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: 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 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

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