Metrics That Matter Analyze. Decide. Execute.
New York, New York
January 1, 2018
Most investors will fondly remember 2017. Indeed, broad stock market averages gained more than 20% in the U.S. and even more internationally. Meanwhile, bond markets were well behaved. Credit spreads are near all-time tights in investment grade, high-yield and emerging markets. The price of oil recovered and the U.S. dollar weakened for the first time in three years. To be sure, the investment landscape in 2018 will be as challenging as ever. In our view, overall market performance is likely to be less robust then the year than just ended. I do not own a crystal ball, but I do not how difficult it is for markets to compound at a rate of 20% on a sequential basis.
Our investment approach here at Chelsea Global Advisors is to focus on what is likely to happen rather than on what can happen in extreme scenarios. Of course, we always strive to position our portfolios in a manner that dampens the effect of severe market declines. Over the last ten years, the S&P 500 has a cumulative return of over 79%, averaging about 6.05% per year. That includes a 40% drawdown in 2008. The lesson here is that the stock market tends to drift higher over time but with sudden and dramatic declines. The pattern is likely to be repeated in the future.
For now, we are watching the FED, credit spreads, corporate and consumer default rates, GDP growth, and headline inflation. Distress signals are likely to originate in one or more of these metrics. Our eyes, and minds, are wide open.
As always, please reach out to me at firstname.lastname@example.org with any questions or comments. We are here to help.
|Key Market Metrics||Ticker||31-Dec-17||
|U.S. Real GDP Latest - Annual Percent Growth||GDP||3.30%||1.96%||1.90%|
|U.S. PCE- Price Index Latest - Annual % change||PCE||1.50%||1.75%||1.38%|
|ISM Composite Index||PMI||58||55||48|
|10y Japanese Government Bond||¥JGB10Y||0.05%||0.04%||0.26%|
|10y U.S. Treasury Note||UST10Y||2.41%||2.44%||2.27%|
|2y German Schatz||€GER2Y||-0.63%||-0.78%||-0.35%|
|10y German Bund||€GER10Y||0.43%||0.18%||0.62%|
|Synthetic Credit Investment Grade OAS||IG||49 bp||68 bp||90 bp|
|Synthetic Credit High Yield OAS||HY||306 bp||355 bp||500 bp|
|Synthetic Credit Emerging Markets||EM||119 bp||239 bp||356 bp|
|High Yield BOA_ Merrill Lynch YTM||HYG||5.78%||6.17%||8.78%|
|Brent Crude Oil||BRENT (C01)||66.87||56.82||37.28|
|10Y U.S. TIPS Real Yield||$USTI10||0.42%||0.48%||0.70%|
|U.S. 5y -30y Yield Spread||5y30y||54 bp||113 bp||126 bp|
|5y 5y Break Even Inflation||5y5yBEI||2.06%||2.07%||1.80%|
|S&P 500 Earning Growth - % year over year change||SPX EA||7.1%||8.0%||-5.7%|
|S&P Price to Earnings- Trailing 12 months||PE||22.50x||24.82x||22.95x|
|S&P Dividend Yield||DY||1.89%||2.07%||2.14%|
|S&P 14 Day Relative Strength Index||RSI||60.95||51.68||47.57|
|Closed End Funds -Average Premium/Discount||CEF||-5.12%||-6.69%||-8.69%|
|% S&P Members > 200 DMA||$SPXA200R||78%||64%||48%|
|NASDAQ - % of shares trading above 50 dma||$NDXA50R||56%||61%||62%|
|Total Market Capitalization/GDP||GURU||1.42x||1.25x||1.18x|
|Stock- Bond Yield Gap||GAP||-1.18%||-1.11%||-1.23%|
|BBB OAS Spread||OAS||127 bp||185 bp||240 bp|
|Bond Confidence Index||BCI||79.0||74.10||71.90|
|M1 Money Stock - Percent Change year over year||M1||9.02%||6.55%||5.07%|
|Velocity of M1 Money Stock- Reported Quarterly||VM1||5.49%||5.68%||5.92%|
|Total Bank Credit (1 month lag)||H8||4.30%||6.80%||7.30%|
|Total Assets of Major Central Banks||CBTA||19.7T||17.6T||15.6T|
|Total Foreign Exchange Reserves -Reported Quarterly||COFER||10.9T||11.0T||11.2T|
|U.S. Corporate Bond Market Volume ADV (1m lag)||SIFMA||31.5bn||30.1bn||27.2bn|
|USD Credit to non-bank borrowers outside of USA % chg||BIS||5.1%||6.2%||3.8%|
|NYSE Margin Debt -$ Billions||Debit||580||489||461|
|FRB Financial Conditions Index (Chicago- Adj)||FCI||-0.74||-0.77||-0.59|
Fear and Greed
|NYSE Bullish Percent Index-50 DMA||$BPNYA||65||65||50|
|NYSE McClellan Summation Index-50 DMA||$NYSI||535||685||184|
|Financial Stress Index||FSI||-1.46||-1.134||-0.596|
|Risk Meter:Trailing 12m performance: Stocks v Bonds||SPY:AGG||18.32%||9.59%||2.07%|
|Short Term Trading Index- 50 DMA||$TRIN||0.99||1.12||1.18|
|CBOE Options Put/Call Ratio- 50 DMA||$CPC||0.90||0.98||0.99|
|CBOE SKEW Index- 50 DMA||SKEW||137.82||126.06||134.84|
|Libor OIS Spread- Basis Points||LOIS||26.59||33.00||23.47|
|Bank CDS Spreads _ Average of 30 Bank Names||CDS||41 bp||88 bp||80 bp|
|CBOE VIX -50 DMA||VIX||10.42%||14.33%||16.82%|
|CBOE VIX Term Premium (Month 7 to 4) Contango||VIX_TP||11.17%||6.54%||3.62%|
|ML Treasury Option Volatility -50 DMA||MOVE||48||73||70|
|CBOE Implied Correlation- 50 DMA||ICJ||38.14||37.18||57.90|
|Gold to Industrial Metal Ratio -50 DMA||$Gold:$GYX||3.32||4.61||4.31|
Asset Allocation Performance - Total Returns
|Asset Class||Ticker||2017 YTD||FY 2016||FY 2015|
|U.S Large Cap Growth||IVW||27.45%||6.76%||5.37%|
|U.S. Large Cap Value||IVE||15.37%||17.10%||-3.29%|
|U.S. Government Bonds Long Duration||EDV||13.96%||1.81%||-4.84%|
|U.S. Bond Aggregate||AGG||3.54%||2.44%||0.48%|
|Investment Grade Corporate Bonds||LQD||7.00%||6.21%||-1.25%|
|U.S. High Yield||HYG||6.00%||13.08%||-5.03%|
|International Equities- Developed Markets||EFA||20.06%||1.33%||-1.00%|
|International Equities – Emerging Markets||VWO||31.38%||12.14%||-15.81%|
U.S. Stock Sectors – Total Return
|S&P Sector||Ticker||2017 YTD||FY 2016||FY 2015|
|Energy Sector -Exploration/Production||XOP||-9.13%||-38.28%||-35.76%|
|Energy Sector- Diversified Oil Companies||XLE||-1.05%||28.02%||-21.47%|
Last Updated: December 30, 2017
I much prefer to analyze and utilize prices of traded quantities rather than economic data when making investment decisions. After all, market prices contain valuable price signals as a result of a (mostly) fair exchange between agents with diversified non- homogeneous expectations, utility and preference curves. There is money on the table so to speak. Conversely, economic data is subject to leaks, revisions, normative biases and by its very nature, is lagging and backward looking.
The handy aphorism “the price always leads the form”, which is a direct quote from Robert L. Bacon’s book Secrets of Professional Turf Betting, applies as much to trading, if not more, than it does to horse racing. Here are some market metrics that I find most useful. They are best used as a medium to longer term guidance, although I have included a few short term trading signals as well.
Rates and FX
10y JGB Yield – Japan has a public debt to GDP ratio of over 200%. The Government has explicitly promised to double the money supply and weaken their currency. Yet 10y Japanese Government bonds yield below 10 basis points due to the Bank of Japans' Yield Curve Control policy.(YCC). Global interest rates should stay modestly low as long as Japan’s interest rates remain subdued.
10Y UST Yield - As long as US 10Y rates remain below 3% or so, U.S. Stocks are relatively attractive compared to government bonds, assuming the average P/E ratio is below 20x. This is the so-called FED model.
2y German Schatz Yield- This is the gold standard of government bonds. Low nominal or indeed, negative yields, indicate that Europe still has many problems. Another Euro sovereign crisis cannot be excluded.
10y German Bund Yield- The spread between German Bunds and their like maturity U.S. Treasury is a good proxy for the relative growth and inflation prospects between the world’s two biggest economic blocks.
High Yield BOA_ML Yield - This is the benchmark rate to assess the “search or reach for yield trade.” I also use the market prices of High Yield benchmarks to calculate the implied default probability.
¥JPY/$USD FX rate - A strong Yen may signal upcoming weakness in the world’s third-biggest economy. It also hurts leveraged investors engaged in the ostensible “carry trade.”
€Euro/$USD FX rate – A barometer of the Eurozone’s ability to competitively run separate national fiscal policies within one single monetary policy union.
Brent Oil Price- Global oil trading is priced in U.S. dollars. Hence, its direction may be indicative of the global demand and supply of U.S. dollars. The price also serves as a broad indicator of potential consumer behavior. For example, rising oil prices may presage a slowdown in consumer spending.
10y TIPS Real Yield- High and positive real rates signal a favorable environment for savings and investment. Negative real rates encourage consumption. High real rates are also supportive of a strong U.S. dollar.
U.S. 5y-30y Yield Curve Spread- The slope of the yield curve may embed investor’s expectations about the future prospect of inflation and interest rates. A flattening curve may signal a slowing of price pressures and potentially lower economic growth ahead.
5y 5y Inflation Break Even- This is the Federal Reserve's preferred market-based metric of inflation expectations. If this indicator is stable and well behaved, we are unlikely to see aggressive rate hikes. The Federal Reserve usually gets very nervous if inflation expectations fall below 2.00% or rise above 3%.
S&P 500 Price to Earnings Ratio- A valuation ratio of a company's current share price compared to its per-share earnings. This metric is widely followed despite its many flaws. The inverse of the P/E ratio, or the earnings yield, is often compared to yields available on risk-free assets such as government bonds. Such a comparison may also be referred to as the “Fed Model.”
S&P 500 Dividend Yield- A financial ratio that shows how much a company pays out in dividends each year relative to its share price. Dividend yields may or may not be correlated with the overall levels of interest rates. Dividends are an important source of returns for equity investors. In recent years, investors have also benefited from a "buyback yield" as companies buy back their shares in the open market. Buybacks are anti-dilutive, meaning they increase the relative ownership stake of each investor.
S&P Relative Strength Index - A technical momentum indicator that compares the magnitude of recent gains to recent losses in an attempt to determine overbought and oversold conditions of an asset. The RSI ranges from 0 to 100. A security is deemed to be overbought once the RSI approaches the 70 level, meaning that it may be getting overvalued and is a good candidate for a pullback. Likewise, if the RSI approaches 30, it is an indication that the asset may be getting oversold and therefore likely to enjoy a trading bounce higher.
Closed End Mutual Funds (Discount)/Premium - Ideally, there would be no difference between a closed-end fund's share price in the market and its net asset value per share. Thus, there would be no discounts or premiums. However, prices are established by competitive markets which reflect "real world" buying demand and selling supply of shares. In turn, these are influenced by investors' perceptions, fear and needs for specific types of investments. Other factors which have been suggested as having an impact on discounts and premiums include: the fund's relative performance, yield, the use of a managed distribution program (guaranteed annual payout of 8%-10%), name recognition of the fund's manager, a significant amount of illiquid holdings in the fund's portfolio and a sizeable amount of unrealized appreciation.
Percent S&P 500 Members trading above 200 Day Moving Average- The percentage of stocks trading above a specific moving average is a breadth indicator that measures internal strength or weakness in the underlying index. The 50-day moving average is used for the short-medium term timeframe, while the 150-day and 200-day moving averages are used for the medium-long term timeframe.
NASDAQ Percentage of Stocks Trading Above its 50 Day Moving Average – The NASDAQ exchange maybe considered more speculative in nature that the NYSE due to its heavy weighting of the technology sector. Hence, a high ratio of NASDAQ shares trading above its 50 days moving average may indicate overbought conditions.
Total Market Capitalization to GDP- Some investors believe that the total capitalization of U.S. stocks should not exceed the value of Real Gross Domestic Product. These investors believe that subsequent stock returns will be poor when market cap exceeds GDP, as it does now.
Stock Bond Yield Gap- This is a relative value measure of the difference between the dividend yield available on stocks and the yield- to-maturity available on high-quality corporate bonds. A negative reading indicates that the dividend yield is below the corporate bond yield. As the spread becomes less negative, stocks become more attractive on a relative basis.
Bond Confidence Index- The Confidence Index is a ratio of the average yield-to-maturity of the Best-Grade bond list compared to the average yield-to-maturity of the Intermediate Grade bond list. The ratio is higher and the bond yield spread narrower as the confidence index rises when investors are confident about the market. The ratio is lower when the intermediate grade average bond yield is rising faster, or at least, falling more slowly than the best-grade bonds. A falling confidence index reflects decreasing confidence in the market.
M1 Money Stock - A measure of the money supply that includes all physical money, such as coins and currency, as well as demand deposits, checking accounts and Negotiable Order of Withdrawal (NOW) accounts. M1 measures the most liquid components of the money supply, as it contains cash and assets that can quickly be converted to currency.
The Velocity of M1 Money Stock - The rate at which money is exchanged from one transaction to another, and how much a unit of currency is used in a given period of time. The velocity of money is usually measured as a ratio of GNP to a country's total supply of money.
Total Bank Credit - A measure of total credit created and extended by the U.S. banking system. It includes commercial and industrial loans, residential and commercial real estate loans, consumer loans and securities held by banks.
Total Asset of Major Central Banks - Central Banks increasingly operate with sizable balance sheets. The balance sheet contains a great deal of information about the scale and scope of their operations and growing balance sheets are associated with improved financial market liquidity conditions.
Total Foreign Exchange Reserves - Also called FOREX reserves or FX reserves and are assets held by central banks and monetary authorities, usually in different reserve currencies, mostly the United States dollar, and to a lesser extent the Euro, the Pound Sterling, and the Japanese Yen. FX reserves may be used to combat a balance of payments crisis or as a tool used to intervene in FX markets. A portion of FX reserves tends to be invested in U.S. fixed income financial assets.
U.S. Corporate Bond Average Daily Volume - a liquidly measure of the U.S Investment Grade and High Yield bond markets. Falling or depressed average daily trading volumes may signal an unsettling and thinning liquidity environment.
USD Credit to non-bank borrowers outside of USA % chg - The U.S. dollar is the world's reserve currency. Many governments, corporations and individuals, outside of the United Sates, borrow U.S. dollar to facilitate their global trade agendas. Changes in the amount outstanding provide insight into global activity trends (e.g. GDP) and the degree of leverage embedded in economies outside of the U.S. These U.S. dollar borrowings must be paid back in dollars, so the amount outstanding can also be a proxy for future U.S. dollar demand.
FRB Financial Conditions Index - In macroeconomics, a financial conditions index (FCI) is an index number calculated from a linear combination of a small number of economy-wide financial variables,such as interest rates and FX rates, that are deemed relevant for monetary policy. The Index is expressed as a Z-Score.
Fear and Greed
NYSE McClellan Oscillator and Summation Index - A market breadth indicator that is based on the difference between the number of advancing and declining issues on the NYSE. The oscillator it is primarily used for short and intermediate term trading. The Summation Index is a longer-term view of the market that stock traders and investors use to identify the beginning and ends of bull markets - the major trends in the market.
Financial Stress Index – The Index measures the degree of financial stress in the markets and is constructed from 18 weekly data series: seven interest rate series, six yield spreads and five other indicators. Each of these variables captures some aspect of financial stress. Accordingly, as the level of financial stress in the economy changes, the data series are likely to move together. Negative readings suggest below average readings of stress.
Risk Meter 12m Performance: Stocks v Bonds- Positive number indicate that during the past 12 months, stocks have out performed bonds. The bigger the difference, the larger the out performance. A large a growing return differential between the returns of stocks and bonds may indicate a "risk on" environment when investors may be feeling exuberant about the prospects for dividends and earnings growth and multiple expansion. A low or falling differential is more indicative of a "risk off" environment where investors are more cautious and seek out the relative stability of bond market returns.
Short Term Trading Index or TRIN- This Index reflects the relationship between the AD Ratio and the AD Volume Ratio. The TRIN is below 1 when the AD Volume Ratio is greater than the AD Ratio and above 1 when the AD Volume Ratio is less than the AD Ratio. Low readings, below 1, show relative strength in the AD Volume Ratio. High readings, above 1, show relative weakness in the AD Volume Ratio. In general, strong market advances are accompanied by relatively low TRIN readings because up-volume overwhelms down-volume to produce a relative high AD Volume Ratio. This is why the TRIN appears to move “inverse” to the market. AD = Advances less Declines.
CBOE Equity Option Put/Call Ratio - is an indicator that shows put volume relative to call volume. Put options are used to hedge against market weakness or as a bet on a decline. The put-call ratio has long been viewed as an indicator of investor sentiment in the markets.
CBOE SKEW Index - is an index derived from the price of S&P 500 tail risk. Similar to VIX, the price of S&P 500 tail risk is calculated from the prices of S&P 500 out-of-the-money options. SKEW typically ranges from 100 to 150. A SKEW value of 100 means that the perceived distribution of S&P 500 log-returns is normal, and the probability of outlier returns is, therefore, negligible. As SKEW rises above 100, the left tail of the S&P 500 distribution acquires more weight, and the probabilities of outlier returns become more significant.
Libor – OIS Spread - The LIBOR - OIS spread represents the difference between an interest rate with some credit risk built in and one that is virtually free of such hazards. Therefore, when the gap widens, it’s a good sign that there are tensions in the financial markets, particularly with banks and bank credit.
Bank CDS Spreads- reflects the unweighted average of credit default swap spreads on 30 individual banks. The universe is developed market banks regulated in the U.S, UK, Euro zone, including Switzerland, and Japan. Higher spreads indicate that it is more costly to insure against an event of default by a bank. Materially rising CDS spreads in the banking sector may signal an impending stress event. Contrariwise, low and stable banks CDS spreads may indicate a somewhat more benign environment.
CBOE VIX - This is a key measure of market-based expectations of near-term volatility conveyed by S&P 500 stock Index Option prices. The index is expressed in terms of annualized volatility.
CBOE VIX Term Premium- The premium, expressed in terms of a percentage, of the average price of the two successive VIX futures prices above (or below) the current spot price. For example, as of April 15, 2015, the May 15 and Jun 15 VIX futures prices were quoted at 15.32 and 16.575 respectively or at an average of 15.94 (15.32+16.575)/2). The average price is 3.35 (15.94-12.60) index points or 26.5% (3.35/12.60) above the spot VIX price of 12.60 as of April 15, 2015. The premium tends to range between 10% and 20%. A reading above 20% may be associated with an overly complacent market- meaning that there is little demand for hedging products. Readings below 10% may signal oversold conditions. I use settlement prices VIX futures to perform the calculation.
Merrill Lynch Option Volatility Estimate - MOVE index was developed by Merrill Lynch to measure implied volatility of US Treasury markets. It is a yield-curve weighted average of the normalized implied volatility of 30-day options.
CBOE Implied Correlation- The CBOE S&P 500 Implied Correlation Index measures expected average correlation of the S&P 500 using SPX option implied volatility and a weighted portfolio of the implied volatility of options on stocks in an SPX “tracking basket,” a subset of the S&P 500 comprised of the 50 largest components as measured by market capitalization. The CBOE S&P 500 Implied Correlation Indexes measure changes in the relative premium between index options and single-stock options. It used as a measure of implied dispersion of future stock returns. The high dispersion may favor a stock selection strategy. Low dispersion indicates most assets within the Index are behaving similarly.
Gold to Industrial Metals Ratio - an indicator used to measure the relative attractiveness of a monetary metal such as gold versus metals used in industrial production. A rising ratio may presage worries about inflation or the relative stability of the U.S. dollar.
Asset Classes - This section represents the broad investable universe available to many U.S. based investors. Each asset class is represented by a well capitalized and liquid ETF. Chelsea Global Advisors, LLC strongly believes that asset allocation decisions are the foundation of the investment management process.
S&P Sectors - Each S&P industry sector has a dedicated ETF designed to track the overall performance of that particular market segment. There are nine sub-sectors of the S&P 500: Consumer Discretionary, Consumer Staples, Energy, Financials, Technology, Utilities, Health Care, Materials, Real Estate and Industrials.The behavior of each sub-sector provides valuable insight into the relative performance of the real economy.