May 2019 Investor Letter

Strategy Performance

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Investment Philosophy and Approach

The Active Asset Allocator investment strategy is designed to deliver a consistent level of positive returns over time with a strong focus on capital preservation. I follow a multi-asset investment approach, actively allocating between global equities, bonds, precious metals, currencies and cash. I always invest with the primary trend of the market and do not follow a benchmark. Instead, I manage the market risk for clients. This strategy has returned +9% per annum net of fees since inception with a lower level of risk than the average multi-asset fund. My active asset allocation approach is best illustrated in the following chart.

 
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Gold Trader focuses on capturing the strongest and weakest parts of gold's daily cycle, buying daily cycle lows, selling daily cycle highs and holding for 10-20 trading days, depending on the cycle count. This approach allows me to effectively manage risk. The strategy aims to capture +5%-6% profit per trade while risking 2%-3% each time, has a win rate in excess of 70% and is structured so that profits are TAX FREE for investors.

Executive Summary

The recent rally in stock markets has taken us back to where support lines were broken during the fourth quarter of 2018. Some equity indices have made new highs, while other have struggled. Relative strength and momentum indicators are not confirming the recent bullish moves. Fewer stocks are participating in the current rally while some former market leaders have stumbled badly. 3M and many chip makers including Intel are some notable examples. The recent breakdown in US/China trade negotiations isn’t helping. Meanwhile in fixed income, the bond bull market rumbles on. I am warming up to a new fixed income position in US Treasuries for the Active Asset Allocator. Turning to the precious metals, I discuss the timing of the next move higher for gold following a nine-month Investor Cycle. It’s almost time.

Equity Market Update

Despite rallying +20% off the December 2018 lows, stock markets continue to look vulnerable to me. Fear has certainly dissipated following the rout in the final quarter of 2018 and most believe that the equity bull market is back on track. They could well be proven correct. However, something just doesn’t feel quite right. Take a look at the NYSE Primary Exchange Index. The relative strength index (RSI) at the top of the chart looks weak, making lower highs despite the sharp rally in 2019 YTD. The same pattern occurred at the end of the 2000 and 2007 bull markets; weaker momentum is also evident in the MACD Momentum indicator at the bottom of the chart. So, despite the almost vertical move higher in equities in recent months, the charts so far are telling a different story.

 
 

The percentage of S&P 100 stocks trading above their long-term 200-day moving average has also been moderating since peaking at 92% in early 2018. Today just 65% of S&P 100 stocks are above their 200-DMA, suggesting that the bull market is fading. Below 50% and bear market forces are back in play.

 
 

Some of the former market leaders have stumbled badly this year. 3M, Intel and Google all missed Q1 2019 earnings estimates and their stocks have corrected sharply. This tends not to happen during bull markets. More than 60,000 3M products are used in homes, businesses, schools and hospitals around the world. As such, 3M is an excellent barometer of the general economic health of US and international markets. 3M global revenues declined -5% year/year in Q1 2019 and adjusted net income fell -14% year/year. Since their recent earnings report, 3M shares have been hit for -20% and have now declined -30% since peaking in early 2018.

 
 

The economically sensitive chip stocks also look vulnerable. The chip companies face huge swings in demand for their products in line with peaks and troughs in the broader economic cycle. From the depths of the bear market lows of 2009, the SOX Index, which comprises 30 semiconductor chip manufacturers, rallied +840%. It peaked in March 2018 and then corrected -27% by December. The risk-on rally that followed has seen the chip-makers rally +48% in four months. The SOX Index recently made new all-time highs, accompanied however by weakening relative strength (RSI) and momentum (MACD). This often happens near the end of major moves. Intel missed Q1 2019 earnings and its shares have been hit for -22%.

Despite being a technology company, Google makes the majority of its money from advertising and the ad market is highly sensitive to the economic cycle. When economic growth slows, companies spend less on advertising. Google recently released earnings for the first quarter of 2019 and disappointed the market. Google shares were hit for -10%.

 
 

The broader tech sector has been more resilient of late, yet a similar pattern of lower highs and lower lows is evident in the RSI and MACD technical indicators I follow. We are overdue a correction at the very least.

 
 

Outside the US, stock market gains have been less pronounced. European shares have lagged the US markets badly despite the sharp decline in the EUR versus USD over the last decade. On that basis, European shares must look attractive to US investors today, at least on a relative basis, which perhaps may encourage additional USD’s to flow to Europe in the future.

 
 

Ongoing trade tensions between the US and China are a cause for concern and stock market volatility is once again on the rise. Following a +35% rally in Chinese shares in the first four months of 2019, we have seen a sharp -11% reversal in recent days as negotiations between Trump and Xi Jinping appear to have reached an impasse. Emerging markets more broadly are struggling to hold the multi-year breakout of 2018. A reversal below 42 for EEM would suggest a failed breakout and potentially lower prices ahead.

In summary, despite the incredibly sharp rally we have witnessed in stocks in the first few months of 2019, I remain cautious. Selling this week has turned my gauge of technical strength of the market lower. My Technical Trend Indicator has begun to mean-revert, but remains in positive territory for now. There are negative divergences all over the place with RSI and MACD indicators making lower highs and lower lows. The equity markets can get into trouble quite quickly if this selling persists for another couple of weeks, so my defensive position remains.

For more information on my stock market analysis, please get in touch. You can reach me at brian@secureinvestments.ie or at 086 821 5911.

Bond Market Update

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The bull market in EU government bonds lives on despite continuing calls for its demise. I like that the recent rally in EU govt. bonds has been accompanied by higher highs in both relative strength (RSI) and momentum (MACD) indicators, confirming the move. This is what we should expect to see in a bull market (unlike what is happening in the stock market). The iShares Euro Government Bond Fund - a 20% position in the Active Asset Allocator investment strategy - is just 1.8% away from making new all time highs.

 
 

As long as this trend continues, and while risk continues to run high across equity markets, I am comfortable holding government bonds in the Active Asset Allocator. In fact, I am considering increasing the bond allocation in in the Active Asset Allocator strategy via a position in long-duration US Treasuries. US interest rates and US long bond yields are destined to head lower over time as the US mountain of debt continues to grow. A recession would accelerate that process. I am still considering the impact of adding USD currency exposure to the strategy. My key concern is that the US is running an unprecedented -4% budget deficit during a time of healthy economic growth (real GDP growth was 3.2% during the first quarter of 2019). The deficit could potentially explode higher during the next recession, which would have negative consequences for the USD. That said, a long US Treasury position would provide a nice hedge for the precious metals allocation.

 
 

For more information on my bond market analysis, please get in touch. You can reach me at brian@secureinvestments.ie or at 086 821 5911.

Gold Market Update

It is almost nine months since the last meaningful low in the precious metals market. The current Investor Cycle (IC) has stretched longer than average, so a meaningful low is overdue. It may have already occurred on 2nd May at $1,267. If not, gold will bottom in the next week or two. Corrections during bear markets are typically heavy selling events, but they do not always have to be. Corrections during bull markets can be milder affairs and we could be experiencing a milder Investor Cycle Low (ICL) this time around. Once we can confirm an ICL is behind us - and a close above $1,300 should confirm this - the next leg higher in gold can begin. I think the bull market is reawakening and wouldn’t be surprised to see a strong move higher over the Summer months.

 
 

Focusing on the bigger picture, the next chart shows the progression of the bull market in precious metals since 2000. Gold rallied +660% from $250 in 2000 to $1,923 in 2011. Next followed the big correction when gold declined -46% over the next four years, bottoming at $1,045 in December 2015. Gold has been trading sideways to higher for the last 3 1/2 years and a nice rounding pattern has emerged of slightly higher lows on each correction. I think gold is preparing to break higher and get the second leg of this bull market underway. Initial confirmation would be a close above $1,300. Once gold breaks above $1,400, it is game on. The backdrop for a bull market in gold (and alternative currencies) could not be more favourable.

 
 

For more information on my gold market analysis, please get in touch. You can reach me at brian@secureinvestments.ie or at 086 821 5911.

At Secure Investments, I advise individual clients on their pension and non-pension fund investment portfolios. To learn more about my Active Asset Allocator and Gold Trader  investment strategies, please get in touch at brian@secureinvestments.ie or 086 821 5911. If you are reading this via LinkedIn, why not visit Secure Investments and subscribe to get exclusive content for free. No spam, ever. Just great stuff.

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