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Our Tactical Asset Class Rotation Model (TACRM) remains an invaluable input in our research process. Listed below is a summary of noteworthy observations from the latest refresh (CLICK HERE to download the presentation):

  • At the primary asset class level:
    • Investors continue to reduce their marginal exposure to every primary asset class except DM Equities. (slide 10)
    • For Commodities in particular, investors continue to reduce their marginal exposure at an accelerating rate. (slides 8 and 10)
    • That said, however, the rotation out of EM Equities and FX has clearly stabilized. (slide 8)
    • In fact, EM Equities is currently the asset class with the highest degree of factor exposures exhibiting positive VWAP momentum across multiple durations. The rally in Chinese equities is largely responsible for this. (slide 7)
    • Investors’ marginal exposure to DM Equities is especially crowded – in the 98th percentile of all readings on a TTM basis and in the 87th percentile of all readings since the start of 2008. (slides 9 and 10)
    • Investors are reducing their exposure to Cash – which is comprised solely of the USD and the VIX – at an accelerating rate, as well. (slides 8 and 10)
    • It would appear a wide-ranging fear of an unwind of consensus positioning (i.e. long USD, long European Equities, short Treasury Bonds, short Commodities and short EM) is driving the aforementioned broad de-risking.
    • We aren’t yet of the view that such an unwind will occur in the near term. That said, however, it’s also not at all difficult to connect the dots on that occurrence given our intermediate-term outlook for U.S. growth and the Fed’s likely response to that.
    • Per Keith's commentary this AM: “Counter-TREND moves have sucked a lot of people in and ripped them the other way, fast… so we just need to be patient until TREND signals confirm [any nascent] phase transitions.”
  • At the individual factor exposure level:
    • Commodities, FX and EM Equities continue to dominate the list of exposures exhibiting the largest degree of negative VWAP momentum across multiple durations. (slide 5)
      • It’s worth noting that the velocity of the downtrends across the preponderance of FX exposures in this list is clearly decelerating. That is bullish, on the margin. (slide 5)
    • DM Equities and Chinese Equities dominate the list of exposures exhibiting the largest degree of positive VWAP momentum across multiple durations. (slide 5)
      • It’s worth noting that the velocity of the uptrends across each of the Chinese Equity exposures in this list is clearly accelerating. That is an especially bullish signal. (slide 5)
    • Within the U.S. Equity Market:
      • There is a clear divergence in momentum within the Size and Economic Cycle style factors. Recall that TACRM tracks 47 unique sector and style factor exposures within the domestic equity market in order to formulate a robust mosaic of market color.
      • With respect to Size:
        • Eight of the ten exposures exhibiting the largest degree of negative VWAP momentum across multiple durations are large-cap equities: IYT, XLB, OEF, XLI, XLU, XLK, IEZ and IWD. (slide 6)
        • Three of the ten exposures exhibiting the largest degree of positive VWAP momentum across multiple durations are small-cap equities: IWO, IWM and IWM. (slide 6)
      • With respect to the Economic Cycle:
        • That Transports (IYT), Industrials (XLI) and Tech (XLK) are among the eight factor exposures exhibiting the largest degree of negative VWAP momentum across multiple durations, while Retailers (XRT) and Homebuilders (ITB) are the top two  factor exposures exhibiting the largest degree of positive VWAP momentum across multiple durations speaks volumes to the divergence between souring late-cycle data (e.g. CapEx and Industrial Production) and firming early-cycle data (e.g. Consumption and Housing) that we continue to highlight. (slide 6)

In the context of the continued uptrend in cross-asset volatility (GFSI) – as well as the uptrend in the volatility of volatility (VVIX) – we hope you find these quant signals helpful in your risk management process. As always, feel free to ping us with questions.

Checking In With TACRM - 1

Best of luck out there,

DD

Darius Dale

Associate