Not Bottom In Sight

Today, we will provide updates on our ETF Strategy. Our ETF Strategy algorithmically employs our systematic analysis of the US economy and financial markets to create a rules-based, quantitative portfolio. At Prometheus, we focus on understanding the underlying mechanics that drive market environments. We use fundamental economic and high-frequency financial data to understand these macroeconomic environments and codify how to best trade markets. This process creates a robust portfolio solution that attempts to provide high return/risk characteristics and high percentage positive ratios at the portfolio level, regardless of the economic environment. Subscribe below so that you never miss out on our systematic insights into markets and portfolio strategy:

For those following ETF Strategy, please note that we have upgraded the strategy over the last few weeks. The core outlook embeded in the strategy has not changed, but addtional risk management signals have been layered in, which may result in some positioning differences.

We ended this week with a significant bid for the dollar, resulting in the dollar having the best risk-adjsuted performance of major assets classes:

Equities and commodities struggled this week, with equities roughly flat and commodities in the red at the end of the week. Treasuries also did not see the support of systems have been looking for, ending the week down 0.3%. Amdist this risk-off, choppy asset pricing, the dollar continued to shine. These market moves came together to increase the market regime pricing of tightening liquidity conditions, i.e., an environment where funding liquidty dries up in both the real and financial economy. We show our market regime monitors below:

Our monitors shows that the primary impulse in markets is the pricing of tightening liquidity conditions, followed by elevated odds of stagflationary nominal growth. The regime-expected returns for most traditional assets classes, i.e. stocks and bonds, remains extremely poor in this environment, and we show this below:

While we have seen counter-trend moves in markets recently, our system continue to tell us that we remain on a downwards trajectory for growth, inflation, and liquidity. The combination of these factors continues to support the dollar and cash as an asset allocation relative to risk assets. Nonetheless, short term equity market momentum has moved counter to our core positions, resulting in losses. However, our systems continue to tell us that the fundamental trend in the economy is downwards. We show a few gauges of the same below:

Our high-frequency growth impulse offers a timely insight into the prospective path of incomes and PMIs. Our propreitary gauge uses measures of the return on capital, the cost of capital, and the income shocks to estimate the “impulse” to growth:

This pressure on the growth impulse is resulting a deterioration in real income:

And, is sowing the seeds for further labor market deceleration:

Therefore, while we may see counter-trend moves in the short-term, the trajectory for real growth remains lower. Resulatantly, our systems continue to tell us to remain positioned for weaker growth, elevated (but decelarating) inflation, and much weaker liquidity conditions. Netting out these factors, our systems are positioning our ETF Strategy as follows, at the asset class level:

As we can see above, our ETF Strategy is now aggressively allocated to Treasuries and the Dollar, while gaining inflation hedges. The systems have also flipped from net short positioning in equities to net long positions in equities and credit, they are mostly looking for relative value withing the equity sector. As the security level, we show the ETF Strategy positioning below:

• Stocks: SPY (4%), XLP (-4%), XLY (3%), XLC (-4%), XLV (4%), XLB (-4%), XLI (4%), XLK (3%), XLF (-3%), XLU (4%), XLE (-2%)

• Commodities: UNG (1%), GLD (5%), PALL(2%)

• Fixed Income: GOVT(11%), TLT (4%), IEF (8%), MBB (11%), HYG (7%), TIP (9%),

• Currencies: UUP (15%)

On a year-to-date basis, the ETF Strategy is now in the red. This is primarily a function of our sharing ETF Strategy positions without risk controls, i.e. without stops or intra-day changes, as it would be unfair to those using the strategy as a base. The majority of losses came during a single week (6/26), where equities rallied significantly versus our positions. We plan on developing avenues to provide our users methods to risk manage our strategies in real-time. However until then we continue to recommend managing positions with stops. Below, we show the ETF Strategy performance year-to-date:

As we can see above, the majority of losses were sustained by the ETF Strategy due to gap risk, wherein positions went against the strategy aggressively intraweek. Therefore, while gap risk many move markets against our strategies from time to time, our systems remain likey to generate returns over the course of the economy cycle. We show the full sample history of the ETF Strategy below:

We continue to be in a challenging environment for real economic growth, and markets are likely to feel this further as liquidity drains from the system. Stay nimble.