Tag Archives: Market Volatility

Comments on Recent Downturn and Volatility

Posted August 25, 2015 by paragon. tags:Tags: , , ,
stock market_optrd

Due to the volatility in the markets over the past few days, we wanted to reach out and let you know of our thoughts and the actions we are taking. We have been saying that this sell-off is long overdue for some time. It is the reason we have been holding a lot of cash and have been more defensive in our portfolios.

•Monday morning dramatic drop (which will be repeated endlessly by the media) was an aberration as most stocks were not open for trading yet.  Prices quoted were not actual bids and offers in many cases.  Many stocks and ETF’s did not open for trading until after the first half hour.  It was panic selling that was very mispriced.

•Overall, this is a healthy event for the market as it lets off much needed steam

•This downward move helps to take risk out of the market

•In the short-term, we are buyers but will move cautiously as we watch how things play out

•We have been selling some positions that have tax losses and adding commensurate exposure in other areas

•U.S. economy is in same situation as before which is fine but not great (nothing has fundamentally changed from one week ago!)

Although the current volatility creates short-term opportunities, there are still things that need to be worked out for the bull market to continue higher longer-term:

•China: The Chinese economic slowdown has dramatically affected commodities. The weaknesses of a command-and-control style of government has become apparent in the government’s futile attempts at controlling financial market moves lately.  The devaluation of the Chinese currency is negatively affecting emerging market currencies and finances with some similarities to the 1998 Asian currency crisis.  All of this is basically an adjustment as China got ahead of itself economically and now has to retrench and absorb the excess as their economy changes.

•The FED: Our central bank is boxed in a bit trying to move off of its historically accommodative monetary policy as the unintended consequences will have to be dealt with and priced in by equity and bond markets.

•Slowing corporate earnings growth: slower, but still growing, earnings were making the market a bit stretched at the prior valuations.  Market corrections help to mitigate this risk.  Fourth quarter earnings will come in higher on a comparison basis and in contrast to the prior three quarters.

Going forward we will be watching how the market reacts with an eye to opportunistically sell on the rallies and buy on the dips as the “Adjustment Period” we have been calling for continues.

Written by Nathan White, Chief Investment Officer of Paragon Wealth Management


Disclaimer Paragon Wealth Management is a provider of managed portfolios for individuals and institutions. Although the information included in this report has been obtained from sources Paragon believes to be reliable, we do not guarantee its accuracy. All opinions and estimates included in this report constitute the judgment as of the dates indicated and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. Past performance is not a guarantee of future results. 

PORTFOLIO PROTECTION: HOW WE ANTICIPATE MARKET MOVEMENT

Posted June 28, 2012 by admin. tags:Tags: , ,
Be Prepared


Written by Dave Young, President of Paragon Wealth Management

At Paragon we follow the mantra of the three “P’s” – Private, Proactive, and Protective. These guiding principles direct our unique approach to investment and wealth management. I thought this would be a good time to focus specifically on the Protective side of our investment approach – what we do to monitor and benefit from market movements.

In one of my newsletters, I wrote about how a consistent investment program can minimize the negative effects of inevitable market downturns. Unlike many advisors who talk about accepting what the market gives, we embrace the challenge of getting the best the market has to offer while avoiding the worst. Our portfolios are designed to maintain and/or accentuate the positive movements of the markets while limiting the negative movements. A pretty tall order, right? Well, what else do you hire an investment manager for?

We are often asked about the criteria we use to choose investments for maximum investor benefit. The protective aspect of our investment philosophy leads us to perform quantitative analysis that considers many market indicators to help determine market risk. What is quantitative analysis? I’m glad you asked. Investopedia defines quantitative analysis as “a business or financial analysis technique that seeks to understand behavior by using complex mathematical and statistical modeling, measurement and research.” In other words, it’s a way to objectively measure things.

In the investing world, quantitative analysts are usually stereotyped as pure numbers people who disregard the qualitative aspects (management expertise, industry cycles, labor relations, etc.) of companies or markets. Many investment managers will often adhere to one type of analysis (fundamental vs. technical) while eschewing all others. This is usually a result of their training, education and experience. We find this to be a narrow and incomplete point of view. We don’t believe that any one style of analysis can give a full picture of market behavior by itself. They all have advantages and disadvantages, and we feel it most effective to use the best elements of each style.

At Paragon, we employ a type of quantitative analysis that incorporates fundamental, technical, behavioral and qualitative factors. These quantitative indicators give us a feel for the market at the present time. They help us determine where the strength of the market is, the degree of the strength and any changes in strength that appear to be occurring. We use them to find out what other market participants are actually doing and what they think about both the current market and where it might be headed.

One of the primary models we use is based upon a composition of monetary, economic, valuation and sentiment indicators. This model attempts to identify periods of outperformance and underperformance of the stock market by gauging the external environment of the market while staying in harmony with the primary trend.

Another one of our favorite models is a sentiment model that uses a variety of indicators to measure investor psychology and the changes in attitude as they occur. This model indicates what percentage of all investors can be classified as bullish on the stock market at any given time. This allows us to anticipate reversals in investor psychology, and thus the market. Our policy is to mirror the general sentiment until it reaches an extreme, at which point we take a contrary position. High bullish sentiment has frequently coincided with intermediate-term peaks in stock prices. Conversely, when sentiment has fallen to low levels (meaning investors are bearish), markets have typically been near a bottom. By understanding sentiment we can take advantage of these market movements by anticipating them before they occur.

Another type of sentiment indicator we rely on uses the CBOE Equity Put/Call ratio. When sentiment gets extreme we can use this information to anticipate market movements that are contrary to the general expectations. Put/call ratios track the activity of highly speculative options traders, who are notorious for being wrong when taking extreme action. In practical terms, this means that the S&P 500 tends to perform poorly when an extreme in optimism has been reached. Conversely, extreme pessimism is often accompanied by high market performance. By keeping our eye on put/call ratios we can identify the extreme sentiment levels that tend to precede reversals in the market and move our investments accordingly.

Other models that we use measure items such as earnings yields, Treasury bill yields, price/dividend ratios, median price/earnings ratios and the number of stocks hitting 52 week new highs or lows. By watching each of these indicators we can get a well-rounded picture of the current state of the market as well make good educated guesses about what will happen next.

Our general policy is to stay invested in the market, using these models to assess overall market risk. When our indicators signal an increase in risk, we reduce our exposure to the market by degrees while keeping the majority of the portfolio invested. Only rarely do they signal for us to be entirely out of the market.

While these models do measure a great many financial indicators, they can’t eliminate risk altogether. Many market events are simply unpredictable. The markets, like life, are full of the unexpected, and the only way to succeed is to stay in the game, keep your head up and be as informed as possible.

Disclaimer
Paragon Wealth Management is a provider of managed portfolios for individuals and institutions. Although the information included in this report has been obtained from sources Paragon believes to be reliable, we do not guarantee its accuracy. All opinions and estimates included in this report constitute the judgment as of the dates indicated and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. Past performance is not a guarantee of future results.

Volatility Unleashed

Posted January 26, 2012 by admin. tags:Tags: , ,
Light House


Written by Dave Young, President of Paragon Wealth Management
Taken from Paragon’s 4Qtr 2011 print newsletter

2011 was a very difficult year for investors. Even though it was one of the most volatile I have ever experienced, the year ended about where it began. The overall trend changed so many times that it was impossible to extract any gains from it.  A thousand point move up followed by a thousand point move down became routine. Since August, intraday daily swings averaged 261 Dow points.

The initial 2300 point sell off in July was triggered by our Treasury Bonds being downgraded for the first time in history. Next, the market became manic-depressive and entered an entirely new realm of volatility. The up and down gyrations were unbelievable and continued for almost six months. Over that time period there were over 20 significant market swings – with the market moving 400 to 1200 points at a time. It was impossible to lock onto a trend because there wasn’t one.

It was a war between the bears and the bulls. The bulls could not believe how cheap stocks were. Prices are close to where they were 12 years ago even though earnings have almost tripled since then. It doesn’t make sense for stocks to be trading at such low prices, based on their continuously increasing earnings.

On the other hand, the bears were scared to death with what was going on in world financial markets. Our treasury bond downgrade had all kinds of potential negative ramifications. No one knew for sure how it would affect the thousands of other bonds issued by U.S. corporations and municipalities. No one knew how it would affect stocks. The outcome of the downgrade held a lot of unknowns, which in turn created a lot of fear and selling.

An even bigger problem was the situation in Europe. The countries of Italy, Spain and Greece were on the verge of a financial meltdown. If a solution was not found to deal with their debt, then it was likely that those countries would default. If they defaulted, they would likely destroy Europe’s biggest banks. If the European banking system went down, it could potentially take some big U.S. banks down with it. That could trigger a major financial meltdown and have the potential to create a repeat of the 2008 meltdown all over again.

This was a high-risk situation with a lot of moving parts. Because it was outside the United States it was very difficult for U.S. investors to understand or assess what was going on. The lack of transparency made investors very nervous and ready to sell at a moment’s notice, which they did repeatedly during the second half of the year.

Usually when markets sell off we start buying aggressively because the downturns are temporary. This time the situation with Europe was different. Our research showed that unlike most downturns, if the worst case played out we could potentially see a rerun of 2008 or worse. That forced us to hold more cash than normal and to invest in defensive sectors for protection – just in case.

Our clients pay us to generate the best returns we can. They also hire us to do what we can to help protect their investments. Historically much of our excess returns have come from minimizing losses in rough markets.  This year our efforts to protect client accounts from a potential European meltdown reduced our overall returns.

To summarize what made 2011 so difficult:

  • The volatility was unprecedented and created endless whipsaws.
  • There was no trend to capitalize on.
  • High correlation between market sectors limits our ability to generate excess return. Usually there is a large range of varying returns among the 250 sectors we track, and we are able to identify those sectors that are growing the fastest. For the last 18 months the range of returns between the sectors has been much smaller than normal limiting our ability to benefit by identifying top performing sectors.
  • The extreme level of risk created by Europe forced us to be very defensive.
  • It was reported in October that 75 percent of all active managers had underperformed the S&P 500. In part that was because large cap stocks (the S&P 500) were the best performers in 2011. Many hedge fund managers got knocked around in the volatility as well. No one was immune with big names like John Paulson (down 35 percent) and Bill Gross (2010 manager of the year) underperforming 90 percent of his peers.

To be continued next week…

Disclaimer
Paragon Wealth Management is a provider of managed portfolios for individuals and institutions. Although the information included in this report has been obtained from sources Paragon believes to be reliable, we do not guarantee its accuracy. All opinions and estimates included in this report constitute the judgment as of the dates indicated and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. Past performance is not a guarantee of future results.  

 

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