Absolute Return Model – 7/9/17

Model remains in TLT and “Risk Off” for the 5th week in a row. Needless to say, the past two weeks have been difficult, pulling models down from +17.46% & +17.36% to +13.04% & +13.11% YTD.  They are still beating the S&P 500 handily (+8.32%), but now trailing the Nasdaq (+14.3%) and Nasdaq 100 (+16.3%).

The “Risk Off” model is now in danger of underperforming the base model due to the inclusion of $GOLD into the formula. As you can see in the attached graph, $GOLD is clearly trending down and will not see any support until it gets to the $1,160 price area.

$gold

I am still not concerned about the long part of the US Treasury curve, as yields on the long end are still clearly in a long term downward trend.

$TYX

Many analysts are warning about a Fed balance sheet unwind.  The argument initially makes sense, but they ignore the tenuousness of the current expansion.  A balance sheet unwind, coupled with another interest rate hike, would accelerate the road to recession and drive investors out of risky assets and into safe assets, such as Treasury bonds.  Net result is stable or lower yields on the long end and an inverted yield curve.  By the way, the spreads are already indicating recession is in our near future.  Not necessarily in 2017, but in 2018 and beyond.

UST ratios.png

Have a great week!


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