Executive Summary
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Technical ProcessInvestment discipline helps manage risks and maintain decision-making consistency, ensuring alignment with long-term goals and reducing emotional biases. Incorporating trend indicators and understanding price dispersion have been key in timing investments and identifying undervalued assets, aiding in portfolio diversification.
However, relying on historical data for these strategies doesn't always predict future market behavior, and the market's efficiency can limit their effectiveness. These strategies also add complexity and costs, with risks of overfitting to past data and challenges in market timing. We also noticed that extreme dispersion does not always result in price movement back to the mean because of persistent trends that may develop. Instead of positioning solely on oversold/overbought signals, our work shows that blending indicators such as momentum, trend, and dispersion can help optimize investment strategies. There are merits to applying trend following approaches during extreme price dispersions. As global interest rates normalize, portfolio returns may be closely tied to individual security characteristics such as earnings growth and profitability. This is evident in the significant total return difference between the top and bottom half of the MSCI ACWI Index. The baton has been passed from passive “riding-beta” strategies to market neutral long/short strategies, many of which have outperformed this year, according to BlackRock. Therefore, we recognize the importance of adapting strategies to various market environments. Disclaimer: The Content is for informational purposes only and does not reflect holdings. Information or other material is not investment advice.
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MACD/RSI Model
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Trend & MomentumThe MACD/RSI model, developed by Kyaw Swar Ye Myint, is designed to provide a comprehensive assessment of market trends and momentum. Instead of relying solely on an overbought/oversold indicator, the model attempts to measure renewed price strength within an existing bullish or bearish trend. Over time, some price trends may become too extended and experience a reversal. Z-scores can be used to measure price deviations from the historical average. While it is difficult to time an exact reversal point, long-term momentum shifts can aid in the gradual rotation away from decaying trends toward emerging trends.
Based on the data provided by Kyaw Swar Ye Myint's MACD and RSI model, the z-score for Copper Futures has gone up from 1.13 at the end of last year to 1.50 at the end of Q1. This z-score tells us that copper prices are higher than what they usually are over the past decade. Copper is sensitive to changes in global economic growth, which was one reason why concerns about China's post-pandemic recovery aligned with a correction in industrial metals in 2022. Since then, copper has retraced about 60% of its drawdown and held support around the top of its multi-year price range. Despite a relatively high z-score, copper is trending higher and the MACD/RSI model indicates improving price momentum. Additional strength in copper could benefit other cyclical assets as concerns about global economic growth fade. Brent crude oil also registered a buy signal based on the MACD/RSI model. Similar to copper, oil prices have held support above their long-term average between $60-$70/bbl. Improving momentum suggests a period of elevated oil prices that may be consistent with a cyclical upswing. Indicators remain bullish on the US dollar relative to the Brazilian real (USD/BRL). This is likely due to more favorable growth and interest rate differentials in the US versus Brazil. The currency pair confirmed a significant long-term breakout in 2020 and has maintained uptrend support. Hang Seng Index Futures experienced an improving z-score from -2.34 in 4Q 2023 to -1.84 from -2.3 in 1Q 2024. The recent price bounce potentially solidified support from the November 2022 price low. The model suggests a short exit (neutral/hold), which means the downtrend is stabilizing. Broadly, negative price momentum in Chinese and Hong Kong equities has slowed, which, over time, may shift our indicator stance from a hold to a buy. In Q4 2023, the MACD/RSI model signaled a long entry for the Euro Stoxx 600 Index. Since then, the index confirmed a breakout to new highs and maintained positive momentum. The model also signaled a short entry for US Sugar Futures, which later confirmed a breakdown below support as upside momentum faded. These insights into various investment options noted above highlight the diverse behaviors and potential strategies within different asset classes. Just as equities can sustain momentum and outperform historical averages during bullish market conditions, commodities and currency pairs might exhibit tendencies to revert toward their long-term means, especially when signals indicate a shift in momentum or market saturation. |
Dispersion
Variability of recent price action to its 10-year average, ranked by product.
Market Strength
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Trend FollowingMike Eirinberg's model is based on price candlesticks and seeks to identify areas with strong buying or selling pressure. Candlestick charts provide valuable insights into price action by comparing high, low, open and close prices. A price impulse within an existing trend could signal renewed momentum. To arrive at a signal, the model identifies candles that exceed the asset's usual volatility. More specifically, it measures features of the current candlestick (including price gaps) with a 14 period average true range. The model aims to follow price strength and avoid price weakness.
In Q1, the model shows the top S&P 500 sectors with strong price action were Materials, Energy, Financials, and Industrials. Potential price dips could present buying opportunities if uptrends persist. On the equity index level, Nikkei 225, TOPIX, Euro Stoxx 50, and the S&P 500 underwent large price expansions and long-term breakouts. For commodities, gold and cocoa displayed strong buying pressure and have yet to show signs of instability. For currencies, USD/JPY displayed strong buying pressure and remains in an uptrend. The model did not identify any assets within our universe with extreme selling pressure relative to prior 14 quarters. However, certain momentum strategies may avoid assets that displayed negative returns during a positive market environment. Based on our experience, participating in existing trends during periods of renewed momentum outshines explicit countertrend positioning. |
Meet the Team
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Kyaw Swar
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