RGNCM Monthly Reporting Package: LoCorr
November 8, 2023
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MTE EOM October 2023
The US and the world woke up on October 7th to a horrific and barbaric terrorist attack on civilians in Israel. Israel soon declared war against Hamas and the geopolitical tensions rose significantly as pundits, analysts and traders tried to analyze all possible scenarios. After a quick reversal, markets traded the rest of the month with an unease that the dangerous situation could suddenly escalate, spiral and engulf the world into a broader conflict.
Our models had a strong start to the month but we were positioned incorrectly over the weekend during the attack on Israel and the subsequent market activity was much more difficult. We ended October down in Macro Diversified and up slightly in Smart Alpha 2x.
The fixed income sector was down slightly with US up and Europe down. US trading was primarily from the short side with some attempts at longs. The second half decline to the lows of this bear market was profitable for the models. Machine learning and long-term models gained. European fixed income was more challenging with its sideways action. Models also played it primarily from the short side but didn’t have the same opportunities.
With the Euro and Aussie essentially unchanged and spending the whole month in a tight range, the FX sector was not ideal for our models. Aussie and Euro signals in longs and shorts weren’t large, but we ended October down in FX. Machine learning and breakout styles had difficulties. Yen trading was a bright spot with our models able to capture the late month decline in Yen.
In equities, the US and European trading combined were around unchanged but the challenging sub-sector for October was in Asian equities. The models were caught short on the rally post terrorist attack and then were unsuccessful in trying from the long side. Machine learning and breakout styles had difficulties.
Commodities were also a challenging sector in October. The V shaped reversal in the metals had the models leaning short from machine learning and contrarian styles. The energy sector’s second half decline generally caught the models leaning long with our longer-duration models long.
Our crypto futures trading had its best month of the year with the models capturing profits from the long side during October’s rally. Long-term and breakout styles profited.
Looking ahead, we will continue to look for opportunities with an eye on risk in an ever unstable and potentially explosive world.
- Paul Shen, CIO
MTE EOM September 2023
“Higher for longer” – the September 20th FOMC dot projections signaled the Fed’s unexpectedly hawkish rate expectations for 2024 and 2025. Markets repriced immediately. The Fed’s hawkish stance continued when on September 26th, Minneapolis Fed President Neel Kashkari said, “I put a 40% probability on a scenario where the Fed will have to raise rates significantly higher to beat inflation.”*
With help from the Fed, volatility as measured by the VIX index rose rapidly from the mid-month yearly low levels of 12.8 to finish September at 17.5. For the month, the S&P 500 was down 5.26%. Ten-year Notes and Bunds were down 2.67% and 3%, respectively. The dollar was stronger by around 2.5% against the Yen and Euro. Gold suffered losses of 5% and Crude Oil bucked the strong dollar and rose 9.44%.
All our programs navigated the higher volatility environment profitably in September with solid gains in Macro Diversified. This was particularly gratifying, as it once again confirmed our expectation that Macro Diversified would profit strongly during equity drawdowns — just as our flagship fund has been known to do for more than 30 years.
Fixed income was profitable, with US up and Europe unchanged. Our models played it mostly from the short side in US fixed income and were able to profit from the continued overall decline in prices. Machine learning and long-term models gained. European fixed income had a similar theme for the month but the strong rally at the end of the month caught the models leaning the wrong way for the strong reversal.
FX incurred small losses across the board. Euro trading was mostly from the short direction, but several intraday reversals whipsawed the models during the month. The models attempted to go long Yen mid-month but quickly retreated from that position and like the Euro, traded mostly from the short side.
US equity trading was a bright spot for September. The rise in realized volatility provided good opportunities for our models and they were able to take advantage of many of them. Machine learning, breakout and momentum styles performed well. European and Asian equities were down slightly.
In commodities, energies and softs were up while metals were down. Overall, the sector was down slightly for September. Longer-term models profited from the continued strength in energies and softs. Silver was a difficult market with the models leaning long early in the month then positioned short during the mid-month rally. Machine learning and long-term models had difficulties.
The Fed’s hawkish stance to stamp out inflation and the inflation mindset is seemingly on a collision course with a slowing China & Europe, stretched US consumer and resumption of student loan payments. We see volatility rise or remain elevated into the fourth quarter.
- Paul Shen, CIO
The Bureau of Labor Statistics released the August payroll numbers on Friday, September 1st and the discussions afterwards were focused on the revisions rather than the most recent employment situation. For example, the June payroll which had a consensus expectation of 230k was revised from original 209k down to 185k one month later and then down to 105k two months later*. With these types of revisions, it’s no surprise market players were focused on them. The downward trend of revisions for all payroll numbers this year has added another factor for market participants to consider.
For August, market players did not find much conviction and markets generally lacked direction. Bund and 10-Year Notes were nearly unchanged at +0.14% and -0.86% respectively. The S&P 500 fell 5.7% intramonth but rallied back to end down a relatively modest -2.1%. The dollar was up slightly against the Euro (+1.4%) and Yen (+2.3%). Our returns were also fairly muted, with all four sectors contributing one percent or less to returns.
Our models found the low volatility European fixed income markets challenging. They were incorrect from both long and short sides as the price action bounced back and forth. Machine learning, breakout and momentum styles had small difficulties. US fixed income had a bit more directionality and our models were able to generate some profits from the short side for August but could not overcome the losses from Europe. We ended just below zero for the sector.
In F/X, the sector P&L was negative and standard deviation was very low, as our models didn’t find many good signals to trade on. Euro led the decline with some initial profits being long, but our results turned negative as the models continued their bullish tilt during the mid-month decline. Later in the month, our medium-term models went short seeking a continuation of the Euro weakness, but ran into the month end rally. Machine learning and momentum styles had difficulties. Yen trading was slightly profitable for most of the month from short positions, but the late month intraday reversal and subsequent small rally hurt the models. We ended the month unchanged.
Equity trading was up overall with Europe and Asia down and US up. Trading in Europe encountered difficulties in the early part of the month when a large down move ended with a reversal back up during US hours followed by more immediate strength in the next two days. US equities had better price action, particularly in the second half of the month. Our models were able to take advantage of the two-way price volatility in the second half with machine language, breakout, momentum and contrarian styles performing well.
Commodities were down slightly overall in August with energies and metals down and grains and softs up slightly. The price of crude rose just about 3% after adding over 15% in July. Our models continued to play mostly from the long side but did make one attempt to reverse, and were caught short on an intraday reversal and long during the mid-month downdraft. Machine learning had difficulties. In precious metals, our models went short mid-month seeking continued weakness but encountered a reversal rally back.
Fall is around the corner and changes seem afoot. Although VIX has fallen back to under 14%, near its lows of the year, we believe signs of deteriorating consumer sentiment, a rise in energy prices and weakness from China are some factors that may play a significant role in the coming months to bring volatility back strongly.
- Paul Shen, CIO
The low volatility environment continued in July with S&P500 (+2.81%) and Nasdaq (+3.81) up for the 5th months in a row. The VIX index was relatively unchanged at 13.63 but the cost of a 1 year 5% out-of-the-money put declined to its lowest premium since at least 2008. Interestingly, this is below September 2017 levels when VIX dropped down to an all-time low of 9.14.
The lack of fear also comes on the backdrop of Ten-year notes (-0.76%) down 3 months in a row and crude oil up 15.57% for July.
Our models ended July with two sectors, fixed income and commodities up and two sectors, F/X and equities down.
It was a tale of two halves in the F/X market with dollar weakness in 1st half and strength in the 2nd. The currency sector was the most challenging in July. In the Yen, our machine learning and contrarians were looking for a reversal of the strong rally early on but encountered continued buying of Yen and suffered losses. Another attempt at shorting Yen after some weakness later in the month weren’t fruitful either. Other currencies were slightly negative with the general theme of getting the first half move right but incurred losses in the 2nd half dollar rally. Machine learning, breakout and contrarians had difficulties.
In the fixed income, our models played it mostly from the short side and was able to capture some profits from the weakness in the early and latter part of the month. Machine learning style was profitable.
In commodities, oil was the story with machine learning and breakout styles profiting from the strong July rally.
While US equity trading was profitable, European and Asia trading were more challenging, and we ended July down for the sector. The models were leaning long in the US and profits were mostly made from the long side. In Nikkei trading, short positions by machine learning, momentum and breakout styles mid and late month weren’t profitable.
Looking ahead, we may see a continuation of the summer equity rally and even cheaper option premium, but we believe that unlike 2017 there are many more issues at hand and the markets are possibly being set for a significant rise in volatility.
- – Paul Shen, CIO
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Financial markets continued to calm in June, and the VIX index closed June at 13.5, its lowest level in more than three years. Equity implied volatility is now back to pre-COVID levels. VIX began the year at 21.7, and outside of a brief rally to 26.5 in March, it has generally been on a steady decline for the first half of 2023.
As expected with a decline in VIX, the NASDAQ composite rose. Its gain of 31.7% was its best first-half performance since 1983. Apple stock market cap hit $3 trillion and the markets have seemingly priced in a highly optimistic future.
Divergences, however, are also afoot. The Dow is only up 3.9% in the first half, equities have decoupled from credit in the second quarter, and the yield curve — historically a leading indicator of stocks — has declined back down near the lows of March and closed the quarter as the most inverted quarterly close ever*.
In June, the S&P500 gained 6%. Ten-year Notes and Bunds were down about 2% and 1.2% respectively. The Euro rose 2% against the dollar, and the Yen dropped about 3.5%.
The Macro Diversified fund was up slightly and the Smart Alpha Program ended down slightly.
Fixed income trading was profitable overall for June. In US fixed income, the portfolio positioned mostly from the short side with the market drifting downward, though the long period of low volatility oscillation around the 113 level gave us very little opportunity. The late-month drop toward 112 helped the models capture some gains. Long-term, machine learning and contrarian styles gained.
European fixed income, however, was more challenging as it traded sideways with low volatility. Our models leaned long, then short and long again for the month with little P/L until the late month decline resulted in losses. Machine learning, breakout and momentum styles incurred losses.
In F/X, the Euro reversed May’s one month downtrend early in June. The rally lasted until mid-month and the market then paused at the 109 level for the next dozen trading days. With low volatility, our models were leaning short at the start of the month and reversed long by mid-month. The low-volatility second-half sideways action was also difficult for the models. Machine learning, breakout and momentum styles found Euro challenging. Other F/X markets were mixed, with P/L flat.
Equities trading was up overall with the US profitable, Europe down and Asia down. In US trading, the models played it mostly from the long side as the US markets rallied strongly. European equities had bigger two-way swings and the models incurred losses on the second half down leg. Machine learning, breakout and momentum families found the European equities challenging.
Commodities trading was inaccurate in June. Precious metals led the decline as our counter-trend models put on some long positions into a weak June precious metals market. Some short positions also incurred losses from large intraday reversals. Machine learning, long-term and momentum styles had particular difficulty.
The generally low realized volatility environment of first half 2023 hides some potentially troubling divergences. We believe volatility regime may shift rapidly and look for good trading opportunities in the 2nd half of 2023.
– Paul Shen, CIO
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The US debt ceiling negotiations and a possible default were the focus of market participants in May. As of June 1st, the House has passed the debt limit bill and will now go to the Senate for a vote. Just as Congress has acted 78 times since 1960 to avoid default*, the US has now increased the debt limit for the 79th time, avoided default and is continuing with business as usual. However, the rapid increase of debt to GDP over the last 20 years is seemingly anything but usual. According to usdebtclock.org, US federal debt to GDP ratio didn’t change much from 1960 to 2000 going from 52.83% to 57.74%. Since 2000, the ratio has leaped up to our current 120.47% and is projected to reach 146% in 2027. It is on a very challenging and unsustainable long-term path. For May, volatility continued to be on the low end with some markets moving out of the recent range while others remained squarely inside. S&P (+0.04%) and Bund (+0.36%) were essentially unchanged, Ten-year was -1.29%, Yen was -2.25% and Euro was -2.97%.
We were down slightly overall in fixed income with US fixed income up and Europe down. In US fixed income, our models were leaning long the first half of the month and incurred some losses. It turned around and traded from the short side in the second half to generate some profits. Machine learning and contrarian styles were positive.
In European fixed income, Gilt trading incurred losses from longs in second half of the month but reversed late and was also wrong on the subsequent end-of-month rally. Machine learning family found the Gilt market challenging.