January 2016 Investor Letter

Active Asset Allocator Performance

performance table.jpg

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. We follow a multi-asset investment approach, actively allocating between global equities, bonds, precious metals, currencies and cash. We always invest with the primary trend of the market and do not follow a benchmark. Instead, we manage the market risk for our clients. Our strategy has returned +11% per annum net of fees since inception with a lower level of risk than the average multi-asset fund. Our active asset allocation approach is best illustrated in the following chart.

 
 

Executive Summary

Global stock markets are under increasing pressure. The S&P 500 has fallen -8% in the first three weeks of 2016, while technology stocks are -10% and small cap stocks -11% YTD. The internal structure of the market has also deteriorated with the number of stocks on the NYSE making new lows increasing significantly in recent weeks. In contrast, the Euro, bonds and gold have acted better and are showing positive returns YTD. Together, these account for 80% of the Active Asset Allocator, which has started 2016 +6% ahead of benchmark.

Government bonds continue to attract safe haven capital flows as stock market volatility persists. I expect gold to also step up as a safe haven asset in 2016 and outline a few more bullish developments this month for the metal, including a +27% increase in investment demand in the third quarter of 2015 and a +62% year/year increase in US consumer demand as recently reported by the World Gold Council.

Stock Market Update

2016 is off to a difficult start for investors. The S&P 500 has delivered its worst January month-to-date performance since its inception in 1923. The S&P 500, NYSE Composite and Dow Jones Industrial Average have all declined -8% in the first 10 trading days of 2016. Global equities in euro terms are -9% YTD. US Transportation (-11%), Technology (-10%), and Small Cap stocks (-11%) have fared even worse, increasing the likelihood that a full-scale bear market may now be in force. In contrast, the Euro, bonds and gold have each acted better and are showing positive returns YTD. Together, these positions account for 80% of the Active Asset Allocator. The S&P 500 closed Friday at 1,880, just 13 points above the October 2015 lows. The Index reached an intra-day lower low of 1,857 but stocks rallied into the close to end another difficult week. A lot of technical damage has occurred and it is now all for the bulls to prove.

 
 

Back in 2008, when the S&P 500 broke decisively below its 50 week moving average (50WMA), stocks sold off sharply but then rallied one final time to test the underside of the 50WMA before the real damage was done. This time around, we have already had one test of the 50WMA from below. We may get another shortly to reset sentiment, which has turned quite bearish in recent weeks (it looks like that this Tuesday morning), or we could just accelerate lower from here. For a rally to occur, the S&P 500 must hold 1,867. If the stock market spends too much time below 1,867, we could be in for trouble. The 50WMA is currently +9% above where the S&P closed on Friday. (US markets are closed on Monday 18th January in observance of Martin Luther King Day).

Outside of US large cap stocks, a lot of technical damage has already occurred. The Value Line Index (lower left chart), an equally weighted index of 1,700 US companies, formed a bull market top in April 2015 and has already declined -22%. The Russell 2000 Index (lower right chart) of US small cap stocks topped out two months later in June 2015 and has also fallen -22% in the intervening period.

The Dow Jones Transportation Average (DJTA), the oldest running stock index in the US (created in 1884 by Charles Dow), comprises 20 stocks in the transportation sector and is an excellent barometer of the health of the US economy. The DJTA has now fallen -28% since topping out in November 2014. The declining transport stocks and collapsing price of crude oil are discounting much weaker trading conditions in the US in the months/years ahead.

 
 

In my October 2015 Investor Letter, I noted that the number of stocks making new highs minus those making new lows had turned positive for the first time in many months and a consistent positive trend would allow me to become more constructive on the stock market. However, I needed to see more data before making that call. Over the following three months, the internal structure of the market deteriorated and the number of stocks on the NYSE making new lows increased significantly. I need to see new highs outpacing new lows before I can turn bullish on equities. In the meantime, I continue to recommend a defensive position in the Active Asset Allocator.

 
 

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

Bond Market Update

 
 

Government bonds continue to attract safe haven capital flows as stock market volatility persists. German 10-year bund yields have fallen -10 bps in 2016 YTD and have almost halved since peaking in June 2015 at 0.98%. Japanese 10-year bond yields have fully retraced their 2015 move, while UK and US 10-year government bond yields have also started trending lower again. If stock market weakness persists over the next couple of months, pressure will come on central banks to restart quantitative easing (printing money, buying bonds) and government bond markets may now be discounting this increasing probability.

German 10-year bund yield

Japanese 10-year bond yield

UK 10-year bond yield

US Treasury 10-year bond yield

High yield bonds continue to fall and are now -14% off their 2014 highs. Last year's divergence relative to equities provided a timely warning for investors that the market's risk profile was changing. Default rates across high yield bonds should spike before this move lower is done and we are not there yet. I expect more pain to come for high yield fixed income investors.

 
 

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

Gold Market Update

Gold in euros returned -0.8% in 2015. A mix of bearish sentiment and apathy continues to surround the sector. The stage is set for the gold bull market to return and there are many positive catalysts, but at the moment, Nobody Cares (This light-hearted presentation by Grant Williams, saved in the Research section of our website, does a very good job of outlining the bullish case for gold and is well worth 28 minutes of your time). I am expecting a trend change in 2016.

 
 

In his presentation, Williams refers to the Q3 2015 World Gold Council report on demand trends in the sector. The report highlighted a +27% increase year/year in overall investment demand for gold in the third quarter of 2015, a +33% increase year/year in bar and coin demand and a +62% year/year increase in consumer demand for gold in the United States in the same period. These are very significant numbers and if this trend continues, it won't take long for the bull market in precious metals to return.

US retail investment demand jumped to 32.7 tonnes generating growth of more than 200% year-on-year. This signaled both a level of interest in gold investment not seen since the global financial crisis, and a level of price awareness on a par with that of Indian and Chinese retail investors. Nowhere was this more clearly demonstrated than in the US, where the US Mint reported rocketing sales of gold eagle coins. Demand for gold was the highest for more than five years: in volume terms, sales hit 397,000oz.
— World Gold Council, Demand Trends Q3 2015

The +33% year/year increase in gold bar and coin demand is shown on a regional basis in the next table. China and the United States stepped up their purchases significantly in Q3 2015.

Physical bullion ETF's lost additional ounces (-4%) in 3Q 2015 but the trend has slowed significantly since the start of last year. Once investors start accumulating ounces in the main gold ETF's once again, the gold bear market will have finally ended. I am monitoring this situation closely.

For more information on our gold market analysis, please contact Brian Delaney at 086 821 5911 or brian.delaney@secureinvest.ie.

November 2015 Investor Letter

Active Asset Allocator Performance

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. We follow a multi-asset investment approach, actively allocating between global equities, bonds, precious metals, currencies and cash. We always invest with the primary trend of the market and do not follow a benchmark. Instead, we manage the market risk for our clients. Our strategy has returned 12% per annum net of fees since inception with a lower level of risk than the average multi-asset fund. Our active asset allocation approach is best illustrated in the following chart.

Executive Summary

Today just 38% of the 3,100+ stocks on the New York Stock Exchange are trading above their long-term moving averages, while in excess of 1,900 stocks are currently trending lower (<200DMA). The performance of the S&P 500 has been dominated by a handful of names. The largest 10 companies in the Index have a combined market capitalization of $3.5 trillion or 18% of the Index's total market capitalization ($19 trillion). So, just 2% of the companies account for 18% of the Index's daily price movement. Amazon, Facebook, GE, Microsoft and Apple are masking a broader deterioration in market.

Meanwhile in fixed income, as the Federal Reserve busy prepares investors for an interest rate increase, finally, the ECB is considering "all options" to reverse their deflationary course. Further interest rate cuts are on the cards in the EU, a sign not lost on core Eurozone government bond markets. 2 year German bund yields have reached minus 42 basis points. This month, we also consider the impact a US interest rate hike could have on the gold market, provide an insight into our 'cycles' research in the precious metals sector and touch on a new investment strategy currently in research mode that we are very excited about.

Stock Market Update

We continue to operate on the basis that a bear market in stocks began in June 2015 and is in its early stages. We anticipate the August 2015 lows will be breached in the next couple of months and stocks could trade meaningfully lower in 2016. As always, we will be guided by the market's underlying trend and will change our view should we see an improvement in stock market breadth (number of stocks in rising trends versus those in declining trends) and relative strength as measured by the RSI Index, in tandem with a bullish turn in our technical trend indicators. For now however, we maintain a defensive position in the Active Asset Allocator with just 20% global equity exposure.

 
 
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While the S&P 500 (SPY) and Dow Jones Industrial Average (DJIA) trade today just 2-3% below their all-time highs, this performance is not a true reflection of the market's overall health in the United States. SPY and DJIA are market capitalization weighted indices and their recent strong relative performance has been dominated by just a handful of names. The largest 10 companies in the Index have a combined market capitalization of $3.5 trillion or 18% of the Index's total market capitalization ($19 trillion). So, just 2% of the companies in the S&P 500 account for over 18% of the Index's daily price movement. The performance of Amazon, Facebook, GE, Microsoft and Apple in particular is masking a broader deterioration in the performance of a majority of US publicly quoted companies.

The deteriorating picture is more visible when focusing on the Value Line Geometric Index, an equally-weighted Index of 1,700 US companies. Here, no single  stock dominates the Index, which has fallen -11% since peaking in mid-summer. Note the deterioration in relative strength since 2014 is very similar to the 2007-2008 set up.

 
 

Today just 38% of the 3,100+ stocks on the New York Stock Exchange are trading above their 200 day moving average, while in excess of 1,900 stocks are currently trending lower (<200DMA). This is not a healthy picture and one we are watching closely. We have seen an improvement since the August lows when just 20% of stocks were above the 200DMA but we need to see at least 50% of stocks trading and holding above the 200DMA before we can become more constructive in our outlook.

 
 

The next couple of months will be interesting. The Federal Reserve will announce next month whether they will finally start the process of normalising interest rates, increasing the Fed funds rate by 25 basis points from zero currently. Increasing interest rates seven years into an economic recovery when signs that economic activity in the US is beginning to weaken and stock market internals are potentially breaking down is a dangerous strategy. The Fed has talked itself into a corner. They have signalled a rate increase, which has been priced into equity, fixed income and currency markets. They must now follow through with that decision or run the risk of losing credibility. A decision by the Fed not to increase interest rates after all their talk will would likely be perceived as a negative signal for investors.

For more information on our stock market analysis, please get in touch. You can reach Brian Delaney at brian.delaney@secureinvest.ie or 086 821 5911.

Bond Market Update

 
 

While the Fed is busy preparing markets for an interest rate increase, the ECB is doing the opposite. ECB Chair Mario Draghi recently announced he would consider "all options" to reverse the deflationary course on which the Eurozone economies have found themselves. Further interest rate cuts are on the cards, a sign not lost on core Eurozone government bond markets. 2 year German bund yields have reached minus 42 basis points. Could the 5 and 10 year yield follow suit? We think so. The trend towards negative core Eurozone government bond yields is killing defined benefit (DB) pension schemes across Europe whose liabilities are surging higher as yields continue to fall. However, the majority of DB schemes remain under-invested in bonds, supporting the trend still higher in bond prices and lower in bond yields.

 
 

While government bonds continue to act well and attract "flight to safety" capital, higher risk bonds are signalling increasing concerns of credit default by high risk borrowers. High yield/junk bonds for example are not confirming the recent highs in stock markets are trading -10% off their recent peak as measured by the Barclays High Yield Bond ETF (JNK). We continue to avoid high yield bonds and emerging market debt in the Active Asset Allocator investment strategy.

 
 

Emerging market debt, which tends to correlate well with riskier asset classes, continues to perform quite poorly reflecting the challenging conditions currently facing many of the EM countries. The Market Vectors Emerging Markets Local Currency Bond ETF is now -27% below is 2013 top.

 
 

For more information on our bond market analysis, please get in touch. You can reach Brian Delaney at brian.delaney@secureinvest.ie or 086 821 5911.

Gold Market Update

Gold typically exhibits a strong negative correlation with the US dollar and tends to struggle (at least in USD terms) during periods of USD strength. Since the USD gold price peaked in 2011 at just over $1,900, gold priced in dollars has fallen -45% while the USD Index has rallied +37%. Today we find ourselves at quite an interesting juncture. The USD Index has formed a third lower peak (red arrows below) when looking back at the chart since 1980. Similar to the mid-1980's and early-2000's experiences, the USD Index formed a sharp peak and reversal each time. The Volcker-induced rally from 1980-1985 was followed by an equally sharp decline fro 1985-1987.

This time round, we have experienced another sharp USD rally, which has now punched through the multi-decade downward sloping trend line. The timing again is interesting as the Fed is potentially set to announce its first interest rate hike in years on 16th December. Markets discount the future and the recent USD rally could be discounting the upcoming Federal Reserve actions. If the USD peaks and reverses on the Fed news next month, it may also coincide with the low in precious metals prices and an end to the four year bear market in bullion.

 
 

A note on timing... We have been following the gold market intently for years and have developed a keen understanding of the short and medium term cycles that are characteristic of the precious metals market. Gold typically moves in daily cycles (DC's) of 20-28 trading days per cycle. There are generally 4 or 5 DC's in each medium-term "Investor" cycle (IC). In bull markets, DC1, DC2 and DC3 are strong, followed by selling in DC4 as sentiment is re-set and price returns to the longer-term upward sloping moving average. In bear markets, DC1 and possibly DC2 are positive followed by heavy selling in DC3 and DC4 as the major trend is down and the bear market pulls the gold price lower. Today, we find ourselves approaching the tail end of the current Investor cycle, with potentially significant (positive) implications for gold once the current daily (and investor) cycle completes over the next two weeks. It also happens to coincide with Federal Reserve announcement next month.

Our analysis of gold's daily and investor cycle patterns has also sparked a potentially exciting new investment strategy at Secure Investments. We are still in research mode and will be writing more on this topic in the months to come. Please check the Research section of our website in the New Year for more information. This new investment strategy has a working title "29 Trades". Suffice to say, we are very excited by the research results experienced to date and the potential for this strategy to deliver exceptional returns in a risk controlled way.

29 Trades focuses on capturing the strongest period of each daily cycle, buying the daily cycle low each time and holding for 10-15 trading days, depending on the cycle count. As we know the low each time we enter a trade, we can effectively manage our risk each time. 29 Trades aims to capture +5% profit per trade while risking just 1.5% each time.  The strategy has a near 80% win rate, which is exceptional. Most successful hedge funds operate on a win rate closer to 60%. Did I mention we are excited about our analysis to date. Stay tuned.

For more information on our gold market analysis, please contact Brian Delaney at 086 821 5911 or brian.delaney@secureinvest.ie.

May 2015 Investor Letter

Active Asset Allocator Performance

Executive Summary

The S&P 500 has only managed a +2% gain since peaking in late 2014 and with the recent move higher, volume is not following price.  Since December 2014, in the weeks when the S&P has declined, volume has increased, while in the weeks when the S&P has advanced, volume has declined (reflecting fewer buyers willing to participate in the move). The global stock market benchmark - the FTSE All World Index - is also flashing some cautionary signals of note. In addition to a stock market update, we cover the recent decline in bonds this month and provide an update on a potential significant turning point for USD and gold later in 2015.

Stock Market Update

We are transitioning from a strong uptrend in US stocks to sideways, range trading with a lot of whipsaw moves to frustrate latecomers. This is the hallmark of a late-stage bull market. The S&P 500 has only managed a +2% gain since peaking in late 2014 and with the recent move higher, volume is not following price.  Buying volume is, in fact, falling as the market rises now and rising as the market declines. This is a troubling development. In fact, since December 2014, in the weeks when the S&P has declined, volume has increased from the prior week by approximately 350 million shares. In the weeks that the S&P has advanced, volume has declined by an average of 565 million shares (hat tip John Hussman for that factoid: www.hussmanfunds.com). While US stock markets appear at first glance to be on a relatively firm footing, smart money is exiting under the radar.

 
 

There are several divergences cropping up that are notable. The economically sensitive index of US transportation companies, the Dow Jones Transportation Average, is lagging and has returned -9% since peaking in December 2014.

 
 

Small companies measured by market capitalization  and Utility stocks in the US are also lagging. The Russell 2000 Index  has not confirmed the recent marginal highs in the S&P 500 this month, while the Utilities have already declined  -10% since January 2015.

The picture is a little brighter for European stocks thanks to a -25% collapse in the EUR versus the USD over the last 12 months. Currency effects however are transitory. Valuation and fundamentals always matter in the end. So, while we note pockets of strength in certain stock markets around the world (Germany, France, Italy, Spain, Japan, China), in aggregate the picture is one of a weakening trend. This is perhaps best captured by a chart of the FTSE All World Index, the global stock market benchmark for active global equity fund managers. The chart today looks remarkably similar to the setup in 2007 when global stock prices reached marginal new highs but technical indicators were flashing warning signals as momentum deteriorated for months before price followed lower with dramatic effect. We are not saying that the same outcome will occur this time, just that it could and we prefer to be defensively positioned ahead of time.

 
 

We are looking forward to the day when we can get bullish on stocks again; bull markets are more fun. For now, however, we remain defensively positioned in the Active Asset Allocator 20% equities / 30% bonds / 30% gold / 20% cash.

For more information on our analysis, please get in touch. You can reach Brian Delaney at brian.delaney@secureinvest.ie or 086 821 5911.

Bond Market Update

The bull market in bonds won't last forever, but we don't think it is over just yet. In the last few weeks, bond investors had an uncomfortable new experience; five, ten and thirty year yields all actually went up and correspondingly, bond prices declined. German 10 year yields shot up by +800% in just 17 trading days from 0.08% to 0.72% before settling back to 0.60%, which is where the German 10-year lies today. The ECB was quick to respond to the mini bond market revolt saying they would accelerate their purchases of core Eurozone government bonds in the months ahead. The time is now at hand for the ECB President to act on his promise.

 
 

The rally in US 30-Year yields from 2.22% to 3.10% was modest by comparison at 'just' +39%. The rally (and decline in bond prices) also looks to us like it is over for now. If we start to see some selling pressure in stock markets, bonds should perform relatively well. We will be watching closely to see if the trend of higher highs in bond prices (and lower lows in yields) continues over the Summer months.

 
 

For more information on our bond market analysis, please contact Brian Delaney at 086 821 5911 or brian.delaney@secureinvest.ie.

Gold Market Update

Gold continues to build a base either side of $1,200, frustrating both bulls and bears, while gold priced in EUR has a more bullish chart. The stage is set for gold to rally sharply later this year, once the USD has finished its relentless run higher. However, gold investors may have to endure one more head-fake move, where USD gold breaks below the recent lows of $1,130, causing the last remaining bulls to capitulate, before the real move higher can commence. It doesn't have to happen this way, but following a 3-4 year bear market, we often see one final   false breakdown that causes the last remaining bulls to capitulate, before the real move higher gets going. 

 
 

How much gas has the USD left in the tank? The next chart may provide a clue. The USD Index has a tendency to peak every 15-16 years. It happened in 1985 at the Plaza Accord and again in 2001 at the top of the tech/telecom stock market bubble. This coincided with the start of the gold bull market. Roll forward another 15 years and you get to 2016. This is what makes the recent USD surge all the more interesting. We could be fast approaching a major peak in the USD that also coincides with the 6-year cyclical bull run in stocks (and maybe bonds too) and bottom in commodities and precious metals. The next major top in the USD and bonds and bottom in gold could be very significant turning points. Gold investors must not get shaken out of positions in the meantime. Patience should be rewarded later this year.

For more information on our gold market analysis, please contact Brian Delaney at 086 821 5911 or brian.delaney@secureinvest.ie.

March 2015 Investor Letter

Model Portfolio Update

Executive Summary

Currency swings are getting more violent, a clear sign of stress in financial markets, as central banks step up their efforts to intervene, all in the name of price stability. Of course, increased currency volatility has been a direct result of central bank intervention. With the Euro -25% in 12 months, systemic risks are rising and a market dislocation cannot be ruled out. Despite the escalating risks, equities continue to trade in bullish mode. In this month's Investor Letter we examine some potential chinks in the armor of the stock market.

The Active Asset Allocator is currently defensively positioned 20% equities / 30% bonds* / 30% gold / 20% cash. (Bonds now include euro government, corporate, inflation linked and absolute return bonds). We increased the allocation to gold in December 2014 from 20% to 30% and gold rallied +20% the following month in euro terms.

Stock Market Update

While stock markets were surging higher back in 2007, three technical indicators were diverging and signalling potential trouble ahead. The Relative Strength Indicator (RSI) and Moving Average Convergence Divergence (MACD) Indicator shown at the top and bottom of the following chart were both losing momentum, making lower highs and lower lows for much of 2007 despite rallying stock prices, suggesting that the underlying trend of the market was weakening. (The third indicator of course is our own Technical Trend Indicator, which forms the basis of the decisions we take in our Active Asset Allocator investment strategy). Both indicators of course proved prescient as stock prices tumbled in 2008.

 
 

Roll forward to today and we may have a similar set up. Global stock markets, measured by the FTSE All World Index above, peaked at 286.09 in September 2014, declined in October 2014 and then made a slightly higher high in February 2015 at 286.34. Today, FTSE All World Index trades at 282. Note however, that the technical indicators, the RSI and MACD, are diverging again. Both have been unable to confirm the recent highs in the stock market. If this internal market weakness persists for much longer, we could experience an acceleration in selling in the stock market. Our own technical trend indicator is also only a couple of days away from delivering another "All Market Sell Signal". We therefore remain defensively positioned in the Active Asset Allocator, holding 20% equities, 30% bonds, 30% precious metals and 20% cash.

 
 

On a regional basis, stock market performance has varied widely, depending on which currency is used as the denominator. Currency swings are getting more violent, a clear sign of stress in financial markets, as central banks step up their efforts to intervene, all in the name of price stability. Of course, increased currency volatility has been a direct result of central bank intervention. With the Euro -25% in 12 months, systemic risks are rising and a market dislocation cannot be ruled out. Despite the escalating risks, equities continue to trade in bullish mode

Since January 2014, the clear stock market winner has been the United States, where the S&P 500 (below left) has rallied +15% while the USD has also gained +26%, providing a double win for non-US investors. The S&P 500 chart in euros now looks parabolic in its rise (below right). Currency volatility is distorting the investor decision-making process and leading to mis-allocations of capital. This will not end well. 

In addition to the overvalued and overbought nature of the US stock market, long USD is now also a very crowded trade. At some point soon, US equities and the USD will both turn lower and non-US investors will suffer a double hit. We continue to advise caution for now.

 
 

Closer to home, the Euro has lost a full -25% of its value in a little over a year, a staggering move (Thank you Mr. Draghi). EU stocks have so far been able to offset those currency losses, albeit to differing degrees. Since January 2014, the Eurostoxx Index has returned +24%, Germany +26%,  France +20%, Italy +12% and Spain +12%. If you are a non-Euro investor however, and you have not hedged your currency exposure, your net return from investing in the EU stock market has been, at best, zero.

The rally in the USD (and plunge in the EUR) has been relentless without any kind of correction in over twelve months. I am expecting a "sell the news" event that puts at least a short-term top in the USD (and bottom in the EUR) as Fed Chair Janet Yellen steps up to the microphone and once again announces she will think about raising rates from zero to 0.25%. When stock, bond and currency markets catch on to the fact that the Federal Reserve is trapped there will be hell to pay, but that is tomorrow's news. Today, investors appear unconcerned.

It is interesting to note that, while US and EU stock markets have been ripping higher, emerging market equities have not participated in the cyclical bull market in stocks over the past five years. Emerging markets have been consolidating in a relatively tight range over that time. A break higher would be a bullish development and likely cause us to add an allocation to EM in our Active Asset Allocator investment strategy. For now, we watch and wait.

 
 

For more information on our analysis, please get in touch. You can reach Brian Delaney at brian.delaney@secureinvest.ie or 086 821 5911.

Bond Market Update

We continue to operate in an environment of low inflation and modest economic growth in the Eurozone, which supports our continued positive outlook for Eurozone government bonds. The ECB is also helping our cause, printing €60BN / month and buying bonds of EU member states in an effort to fulfill their price stability mandate.

Yields on AAA and AA EU government bonds have reached record low levels and have moved below zero for 2 and 5 year bonds in Germany, Netherlands and Austria. We believe there is still scope for peripheral EU bond yields to fall and prices to rise. The performance and asset distribution of the iShares Euro Government Bond Fund ETF in our Active Asset Allocator strategy is summarised below.

Our smaller allocation to EU corporates and inflation linked bonds offer some additional protection in the form of a higher yield for corporates and inflation protection in the index-linked fund. However, these holdings are more short-term tactical positions rather than long-term holdings, as we continue to wait for a lower-risk entry to the stock market.

For more information on our bond market analysis, please contact Brian Delaney at 086 821 5911 or brian.delaney@secureinvest.ie.

Gold Market Update

The USD surge (and EUR plunge) has been one of the most violent on record since the Euro started trading on world financial markets on 1st January 1999 (at €1.00 / $1.1743). The Euro is now approaching oversold levels on a technical basis (MACD and RSI) and we should expect a rally in the EUR from here.

 
 

Commodities have borne the brunt of the USD rally over the past 18 months but are now trading at long-term support. The CRB (Commodities Research Bureau) Index for example is priced at a -20% discount today to the price it reached all the way back in 1996. Despite the US central bank printing trillions of USD in the intervening period, investors continue to focus on deflation as their main concern.

 
 

We are getting close to the inflection point when inflation rather than deflation becomes the key focus for investors. This is why we own gold in the Active Asset Allocator. Despite the correction in 2013, gold (priced in euros) continues to be the stand out performer relative to equities and bonds since 2007. Gold also provides an excellent hedge during difficult, volatile markets. 

We increased our allocation to gold in the Active Asset Allocator in December 2014 and caught the +20% surge in Euro gold in December and January. Now that the USD has potentially topped, we are looking for gold to make its move. If we don't get what we are looking for, we cut back our allocation to precious metals accordingly, but for now, we are happy with our positioning and remain patient for gold to show its hand.

 
 

For more information on our gold market analysis, please contact Brian Delaney at 086 821 5911 or brian.delaney@secureinvest.ie.

January 2015 Investor Letter

Model Portfolio Update

Executive Summary

Despite being defensively positioned for much of the year, the Active Asset Allocator delivered a strong performance in 2014, +15.6%, outperforming the average multi-asset fund by +3.1%. Buy-and-hold equity investors have been spoiled in recent years as all news has been treated favourably. That trend is about to change and many will be caught wrong-footed. We anticipate another strong year for the Active Asset Allocator in 2015 as we navigate what we expect will be increasingly turbulent waters.

The Active Asset Allocator is defensively positioned today 20% equities / 50% bonds* / 30% gold. (Bonds now include euro government, corporate, inflation linked and absolute return bonds). We increased the allocation to gold in December 2014 from 20% to 30% and gold has since rallied +9% in euro terms.  

Equity Market Update

Is history about to repeat? January 2015 has started out in quite a volatile fashion with government bond yields falling (and bond prices rising), crude oil prices tumbling, high yield bonds topping out and the US dollar rallying sharply. The same trends occurred in 2008 before the stock market fell out of bed. 

In our December 2014 Investor Letter, we began with a 6 month chart of the S&P 500, questioning the sustainability of the recent break out to new all time highs, given the many risks that we see on the horizon. Our cautious stance has so far been proven correct. Shortly after breaking out to new 52-week highs, the S&P 500 rolled over and plunged -10%. We then witnessed a sharp bounce in what we noted at the time had all the hallmarks of a short-covering rally, followed by more selling in the first week of January 2015, which is where we find ourselves today. Heightened stock market volatility will be a prevailing theme this year. Be prepared.

 
 

Last month, we also discussed the plunging price of crude oil, which we expect will drive many financial trends all over the world in 2015. We highlighted the strong positive correlation between European equities and Brent crude and noted that crude oil was either about to have a snap back rally (unlikely) or European equities were in trouble. Let's take a look at the updated chart today.

 
 

In a little over a month, Brent crude has fallen another -30% or $21/barrel, while the German Dax Index has dropped -5% or almost 500 points. This divergence has a long way to run before it resolves itself either by crude oil rallying sharply or European equities entering a bear market. For now, we continue to be positioned defensively in the Active Asset Allocator.

For more information on our analysis, please get in touch. You can reach Brian Delaney at brian.delaney@secureinvest.ie or at 086 821 5911. 

Bond Market Update

Following the strong performance by government bonds in 2014, we have begun to shorten the duration of the bonds we hold in the Active Asset Allocator, making the portfolio less sensitive to changes in interest rates. We also started to increase the allocation to inflation-linked bonds and corporate bonds. We will likely keep the allocation to corporate bonds relatively low as they are positively correlated to risk assets. 

Government bond yields around the world continue to decline and credit spreads (the difference between risky high yield bonds and lower risk government bonds) continue to widen. We witnessed the same phenomenon in early 2008 as investors started pricing in the increased global macro risks at that time. The credit spread ratio on the chart below has not yet reached 2011 or 2008 levels, but it is still rising and the slope is getting steeper. We are watching this chart closely, particularly now that the down-sloping trend line from 2009 - 2014 has been broken.

 
 

High yield bonds have not confirmed the recent highs in the S&P 500, which is another red flag we are monitoring closely for now. Should equities and junk bonds rally to new highs together, we will move back to a more constructive asset allocation, but for now, continued caution is warranted in our view.

 
 

For more information on our bond market analysis, please contact Brian Delaney at 086 821 5911 or by email at brian.delaney@secureinvest.ie.

Gold Market Update

Gold has historically performed best during periods of US dollar weakness relative to other currencies. What we can see clearly in the following chart is that since 2011, gold has struggled while the USD Index (faded blue line), a proxy for the US dollar, has rallied sharply. Gold got ahead of itself in 2011 and too many bulls crowded the long side of the precious metals market. Those late to the party have now been well and truly shaken out of their positions. Sentiment has reached a negative extreme and it is our view that the three year bear market in gold may have ended in December 2014.

Look closely at the chart below. You will see that the US dollar has rocketed higher over the last few months but gold has refused to decline. This is quite a change in behaviour for the precious metal and a clear signal that the gold bull may be about to return. We recently increased the allocation to gold in the Active Asset Allocator from 20% to 30% to capture what we expect will be rising gold prices in the months ahead.

 
 

When gold recaptures the longer-term 20 month moving average, we will become more confident that the gold bull market is back. Capital should come flooding back into the precious metals sector when the trend higher resumes.

 
 

For more information on our gold market analysis, please contact Brian Delaney at 086 821 5911 or by email at brian.delaney@secureinvest.ie.

October 2014 Investor Letter

Model Portfolio Update

Executive Summary

Without an immediate about turn in the stock market, we will get an "All Market Sell Signal" on Friday for the first time in over a year. Stocks are now trading at their second highest ever reading based on Warren Buffet's favourite valuation tool. Stock market volatility has picked up recently, and in the short-term, equities are oversold and should bounce. In fact, there have been six other times the Vix Index has jumped 60% or more in three days. Every time, stocks rallied over the next two days. In four of the six times, the rally marked the end of the decline. However, in the other two instances, stocks rallied for 5-7 days and then rolled over to new lows. Our best advice is to continue to follow our Active Asset Allocator Model which is defensively positioned 20% equities / 30% 5+ year Eurozone government bonds / 30% absolute return bonds. / 20% gold.

Equity Market Update

This is a big week for the stock market. My Technical Trend Indicator (TTI) will deliver its first "All Market Sell Signal" in well over a year this Friday unless stocks do an immediate about-turn. Risks are running high as equities enter their sixth year of rising prices without a meaningful correction (we typically experience a 20% correction in stocks every 3.8 years on average). Investors must now contend with an overvalued stock market, overly bullish investor sentiment, the end of the Federal Reserve's latest round of money printing (QE3), which has provided $1 trillion of support to the capital markets this past year and a technical trend change in the market.

We have come a long way since the 2008/9 stock market lows and that is now reflected in equity market valuations. A Warren Buffet favourite valuation tool: US corporate equities are now valued at 127% of US nominal GDP, the second highest reading in history.

The S&P 500 has traded for 475 consecutive trading days above its 200 day moving average - the longest stretch in history - but closed below key support on Friday. While the most popular stock market indices (Dow Jones Industrials, S&P 500 and Nasdaq) are holding up reasonably well so far this year, the smaller cap indices in the US and many key European stock markets have been trading much weaker recently.

The character of the market is changing and this can be seen in the spike in volatility measured by the Vix Index (below) that has coincided with the recent decline in the stock market. In the short-term, stocks are oversold and should bounce from here. In fact, there have been six other times the Vix Index has jumped 60% or more in three days (19/10/1987, 13/10/1989, 8/6/1990, 27/2/2007, 6/5/2010 and 8/8/2011). Every time, stocks rallied over the next two days. In four of the six times, the rally marked the end of the decline. However, in the other two instances, stocks rallied for 5-7 days and then rolled over to new lows. If we get a relief rally that fails over the next week, watch out below. We remain defensively positioned in our Active Asset Allocator Model.

 
 

High yield bonds are also signalling renewed stress in the credit markets for the first time in over three years and equity investors definitely don't like it when junk bonds are plunging to new lows as they are today.

 
 

So, what's an investor to do? The technical trend indicator has navigated the market turns like a professional. Our Active Asset Allocator investment strategy has switched to defensive mode ahead of every significant stock market decline and reverted to bullish mode to capture each medium-term rising trend since inception. Note: the Active Asset Allocation Strategy switched to defensive mode in June 2013 due to our concern over the ageing equity bull market and has since benefited from an overweight position in bonds.

For more information on our analysis, please get in touch. You can reach Brian Delaney at brian.delaney@secureinvest.ie or at 086 821 5911. 

Bond Market Update

US and EU government bond yields are turning lower again but have yet to make new all time lows. Even if they do, there is limited room for yields to fall. We will likely stay in this low yielding environment for quite some time, particularly if equity market volatility picks up over the next 12 months. Only a bout of inflation or a currency crisis will cause yields to spike.

High yield bonds also look unattractive for yield seeking investors, particularly following their recent break lower. So, for investors in search of safety in a low yielding fixed income world, we are left with short duration government debt, emerging market debt and/or absolute return bond strategies. We have an allocation to two of these strategies currently in our Active Asset Allocator model and are happy to discuss in more detail.

For more information on our bond market analysis, please contact Brian Delaney at 086 821 5911 or by email at brian.delaney@secureinvest.ie.

Gold Market Update

Commodities as an asset class remain totally out of favour. The CRB Index, when measured against the S&P 500, has returned to 15 year lows, quite unbelievable when one considers the trillions of newly printed notes circulating in the system. We could start to see a rotation into this asset class if equities start to turn lower.

 
 

Gold continues to hold up quite well here, particularly gold priced in euros, which is +11% YTD. Despite gold's resilience to hold above $1,200, I am not hugely excited about the triple test of $1,180 by USD gold in recent months. These support zones tend to become targets for active traders and there are probably plenty of stops placed just under those levels. We could head back below $1,180 on the next decline for gold. That said, this bear market in gold is getting long in the tooth. 2015 could be the year for precious metals to shine once again as one of the remaining true safe haven stores of value in a fiat currency world. In the meantime, continued patience is required.

 
 

For more information on our gold market analysis, please contact Brian Delaney at 086 821 5911 or by email at brian.delaney@secureinvest.ie.

June 2014 Investor Letter

Model Portfolio Update

Executive Summary

Our model portfolio remains defensively positioned 20% equities / 50% bonds / 20% gold / 10% cash ahead of what we expect to be an increasingly volatile second half to 2014. We are still tracking ahead of benchmark this year despite a more conservative portfolio and are on track to maintain our double digit annual return since inception. 

We are also excited to launch Delta Futures this month, an actively traded investment approach using multiple asset classes across multiple time frames. Delta Futures has returned +33% since launch on 1st January 2014. Please get in touch for more information on how to implement our Active Asset Allocator or Delta Futures investment strategies.

Equity Market Update

All markets move in cycles. Bull markets spend the majority of their time advancing, interspersed with periods of consolidation and/or correction. Bear markets do the opposite, spending the majority of their time declining, with strong counter-trend rallies separating each move lower. Analysing market cycles helps to set the framework for making informed investment decisions. Examining 50 years of stock market data shows us that the average equity market Investor Cycle lasts 22 weeks. In a healthy bull market, we should therefore expect 15-18 weeks of solidly rising stock prices, followed by a period of consolidation or correction. The strongest bull markets tend to give back the least during their consolidations. 

We are now on week 18 of the current equity market Investor cycle, so history tells us that we should be on watch for a move down into an Investor cycle low. Investor cycle lows are often strong selling events, so this is why we continue to advise caution in the short-term. We are also on Year Six of this powerful bull market in stocks. A study of market history also tells us that equity bull markets have tended to last 3.8 years on average. So, the current bull market in stocks is getting long in the tooth. This is one of the key reasons we are also cautious in our medium-term outlook for stocks.

Let's examine some charts to see if our cautious outlook is justified. At first glance, this equity bull market looks remarkably resilient, still favouring those with a bullish bias. The major US large-cap indices are making new highs each week and selling pressure is non-existent. However, if you look a little closer, you will see some initial signs of weakness, though they are only initial signs at present. Smaller cap stocks for example, measured by the Russell 2000 Index, are struggling to keep up with the S&P 500. While the S&P 500 is hitting new all-time highs, the Russell 2000 is -7% off its own recent peak. The small cap sector is considered riskier than its large cap counterpart and small cap stocks typically tend to lead the market, higher and lower. So, perhaps the Russell 2000 is signalling that the current trend is beginning to weaken.

 

The stock market's underlying technical strength has also been truly impressive. A majority of the the 3,000+ stocks that trade on the NYSE have been in steadily rising uptrends for the majority of this cyclical bull market, as can be seen in the Advance/Decline Line below for the total market. This total market A/D Line is a key input into our technical trend indicator, which drives the asset allocation decisions we make. Now, if you look closely at these charts, you will see that, while the total market A/D Line remains in a steadily rising uptrend, the Large Cap Breadth Index A/D Line has flattened out. This means that the largest stocks in the index are no longer driving the stock market higher. This could change in a few months time, which would be a bullish development and cause us to move back to a fully invested position, but for now, caution is advised. It is the same story for the Most Active Stocks Index A/D Line, which has stalled despite the price indices hitting new highs recently. Stocks that are attracting the greatest daily volume are no longer leading the market higher. The stock market is looking tired.

 

Many of the stocks that have been leading the market higher until recently are in the social media and biotech sectors and some have taken a drubbing in recent weeks, another sign that the character of this market is changing. Tesla (TSLA) plunged -33% in March 2014. Facebook (-24%), Netflix (-35%) and Twitter (-61%) have also experienced very sharp corrections recently.

 

In our April 2014 Investor Letter we noted that a record number of unprofitable IPO's were coming to market and only in 2000 did we see a greater number of money-losing businesses taken public. The door appears to be closing now if the recent price action of the above stocks is anything to go by. 

We are also concerned about the recent turn lower in margin debt (money borrowed to buy stocks on margin). History has not proven very kind to investors when margin debt peaked in the past (1987, 2000 and 2007) and began to unwind as investors headed for the exit. 

Finally, if the US dollar is emerging from a 3-year cycle low, which is looking more likely each day as time passes, then it could put the breaks on this strongly trending US equity market. The US dollar index is made up of a basket of currencies, with the Euro having the biggest influence on the direction of the USD at 55% (followed by the Japanese Yen at 15%). Over much of the last 12 months, a rising Euro has coincided with a falling USD and a sharply rising US equity market. Since May 2014 however, the trend has started to turn. 

 

 The ECB meets later this week and Mario Draghi will likely attempt to talk down his currency again in an effort to stave off the growing deflationary threat across the Euro zone. We An additional interest rate cut will likely send the Euro lower versus the USD.

 

To learn more about the full range of investment services available at Secure Investments, please contact Brian Delaney at 086 821 5911 or by email at brian.delaney@secureinvest.ie.