amriphoto/E+/Getty Images

Stay Nimble Out There: May Notes and Charts

Share This

Market Recap & Looking Forward

May marked the first negative month in 2019 for most U.S. indices and sectors.  After a strong 4-month start to the year, month #5 registered the following results:  the S&P 500 Total Return Index shed 6.35%, the Nasdaq and Small Caps (using IWM for the Russell 2000) each lost nearly 8%, and Transports dropped roughly 10% (COMPs below).  The bleed was not confined to the U.S. – or equities – alone.  Oil spilled over 16%, copper dropped over 9%, and lumber was cut by more than 10% (COMPs below).  The S&P 500 lost its 200-day moving average near the end of the month.  WTI Crude Oil is trading like $50/bl is a magnet.  The only winning trades in the month of May were (seemingly) long bonds and long the U.S. Dollar.  The action in bond yields stood out the most (in my opinion).  Yields drove off a cliff.  The bond market is – and has been – flashing that there’s trouble in the land of risk-assets.  Equities started paying attention to this sometime in May.  According to the bond market, a rate cut (at least one and maybe two) is more likely to happen than not sometime this year (and may happen as early as July).  Just a few months ago, investors (myself included) were worried about higher rates.  Today, investors are worried about what lower rates implies for global growth.  Tariffs and interest rates – and all the talk around them – has become a headline or Tweet away from moving markets.  President Trump’s latest action in tariff-land against Mexico is significant.  Mexico is the U.S.’s third largest trading partner (behind China and Canada).  The trading world needs to know  “are the use of tariffs going to become broader?”  Supply chains are getting disrupted.  Ripple effects are now a fast-paced river flowing through the economy.  Watching ISM & PMI data releases are important.  While I do think that equity markets are vulnerable here (especially the Nasdaq), and extra caution is warranted, many sectors and individual equities are starting to look interesting on the long side.

High Velocity Start to 2019 ‘Cooled-Off’ in May

Wennco BXM Chart May 2019

Source: Bloomberg


Oil, Copper & Lumber Went Away in May


Source: Bloomberg


Bloomberg Risk-On Risk-Off Index:  ‘Things’ Quickly Got Risk-Off (Maybe Too Quickly)?


Source: Bloomberg


S&P 500 Trading Envelopes:  Monthly Chart


Source: Bloomberg


10-yr Treasury Bond Yield (6 month chart)


Source: Bloomberg


2-year / 10-yr Treasury Curve:  No Inversion…Yet


Source: Bloomberg


3-month / 2-year Treasury Curve Inversion


Source: Bloomberg


3-month / 10-year Treasury Curve Inversion


Source: Bloomberg


WTI Crude: $50/bl is Important to Hold


Source: Bloomberg

Forward PE Ratio of the S&P 500:  2004-2019.  18 Has Often Marked a Top  


Source: Bloomberg


Bond Market Pricing in Cuts Coming Soon


Source: Bloomberg


Updated Ratio:  Small Caps vs. S&P 500 (Divergence is Reversing & Correlation Picking Up)


Source: Bloomberg


Updated Ratio:  Transports vs. S&P 500 (Divergence is Reversing & Correlation Picking Up)


Source: Bloomberg


Market Breadth Weakening


Source: Bloomberg


Here are the key drivers that we see as most important in this market (in no particular order as they are all significant):

  1. U.S. – China Trade Talks:  How will markets react to the eventual deal with China?  Does this happen at the G-20 event in late June?
  2. Oil is Holding Steady over $50/bl:  Higher oil prices with slower global growth isn’t a good combination, and that’s where we are today.  Away from that, $50 remains a key level to hold for all markets, especially high yield. 
  3. Earnings and Guidance:  Lackluster revenue and forward guidance have been the ‘themes’ thus far in 2019.  Does this change with Q2 earnings prints?
  4. Interest rates and the Fed:  The Fed refused to end the current cycle in 2016 and seems adamant on trying to avoid it again now.  The Powell put is newly formed – but its strength and reliability is TBD.  After all, he went from hawkish to dovish on a dime.  Powell pivoting back to hawkish if the data picks up isn’t far-fetched.  But without strong data, the odds of a rate hike(s) for the balance of 2019 is zero.  And even if growth picks up, the odds are still near zero.  The market is now pricing in rate cuts in 2019. 
  5. Debt:  Debt quality is deteriorating at the same time debt levels are very elevated.  While there has been some deleveraging in households and the much of the banking sector since 2008, both corporate debt – away from financials – and debt to GDP are at nosebleed levels that can add fuel to the next bear market.  The growth of the triple BBB corporate bond market is especially worrisome.


Wennco Downshift ETF Hedged Equity Strategy Update:  

Since inception (7/1/18) through 5/31/19, Downshift ETF’s performance is -1.70% (net of Wennco fees) vs. 3.14% for the S&P 500 Total Return Index.  The month of May registered the third negative month for the S&P 500 Total Return Index since Downshift’s inception:  the strategy was -2.04% in May (net of Wennco fees) vs. -6.35% for the S&P 500 Total Return Index.  Since inception, the other two negative returning months for the S&P 500 were October 2018 (-6.84%), and December 2018 (-9.03%).  During these 3 negative months (October 2018, December 2018 and May 2019), Downshift ETF captured, on average, 34% of the S&P 500’s -7.40% monthly average.

Additionally, Downshift ETF is slightly outperforming the BXM Index since strategy inception – (the BXM Index is a monthly buy-write/covered call index against the S&P 500).   The BXM has 1 layer of negative correlation (covered calls).  Downshift ETF has 2 layers of negative correlation: covered calls and long-dated puts on the S&P 500.

BXM Index & S&P 500 Total Return Index COMPS (6/30/18 – 5/31/19)

Wennco BXM Chart May 2019

Source: Bloomberg


Downshift ETF is available to invest on Schwab’s Marketplace Platform.  Our latest 2-pgr can be found here:

Why Downshift?  Owning uncorrelated return streams is important to preserving wealth, and especially makes sense in late in market cycles (like where we are today).  Bonds have become less uncorrelated to equities, and investors need more reliable sources of protection in risk-off markets.  Our strategy has two parts which are negatively correlated to directional equity markets:  long-dated and actively managed S&P 500 put options and actively managed covered calls.  Owning both market beta (direct correlation to the S&P 500), along with uncorrelated return sources (covered calls and S&P 500 put options), is a prudent way to grow assets over time.  Downshift ETF seeks to minimize drawdowns and maximize compounding returns over the long term.

Union/Wennco Covered Call Strategy:

I am excited to announce the availability of our co-managed covered call strategy on Schwab’s Marketplace SMA platform.  This strategy has been co-managed by Union Wealth Management and Wennco since 2/1/18.  The underlying holdings are equities, and the core strategy has a long and successful track record.  As of 3/31/2019, our covered call strategy has outperformed the Russell 1000 Value Index as well as the BXM Index since the strategy inception date.  Please see the strategy.

I hope everyone has a great June.  Stay (extra) nimble out there. 



Chris Wenner
CIO & Head Trader
Wennco Downshift Strategies


Share This
No Comments

Leave a Reply