As we approach the end of another temperamental summer market we are reminded again of how important it is to assure the diversity of our portfolios. Volatility has again become exaggerated, due largely to a market severely starved of liquidity. Although summer markets are historically thin, this summer has been more dramatically affected due to the recent losses of both MFG and PFG. In conditions like these where volume is as low as it is, price discovery can become increasingly difficult and unpredictable.
The equity market has been and will continue to be very consumed by every grumble, whisper, or rumor from the EU. As Italy and Spain become the focus of the EU debt crisis there is substantial global concern that the nation’s third and fourth largest economies are warranting a full bailout. This is happening as the S&P has decided to cut Greece’s outlook from “stable” to “negative.” Despite this negativity a 40 point S&P rally can easily be induced by a few positive comments or the mention of further bond buying. As we are uplifted by a bond buying frenzy out of the EU we are further motivated by rumors that Bernanke is considering a similar action. This dramatically fundamental market can cause markets to stop trending and start becoming comfortable in a range that it seems to want to gap almost weekly. There are CTAs that have historically done well in volatile markets, but past performance is not an indicator of future results. Now is the time to take a closer look at some of those CTAs, understand their strategy and inherent risks, and position yourself as dynamically as possible moving forward.
The Energy and Agricultural markets have disregarded this wide spread range and have reached record highs. Oil prices are being encouraged higher from nearly every fundamental consideration. Whether it be tropical storm Ernesto and its potential interruption of oil imports through the Gulf of Mexico, a pipeline explosion in Turkey that shut down oil flow from Iraq to world markets, or a refinery fire in California. These reasons coupled with the bond buying being discussed and it is of very little surprise that we are sitting at or near record highs. Oil and Nat gas volatility has been high and probably will continue to be.
As I mentioned above the Agricultural market has more than just broke out of the range with a rally across the grain markets. Corn has rallied over 50% in the last two months; wheat futures have rallied nearly 34% in that time and bean futures are up 27%. The recent rain in the Midwest paused the price surge but it is a bit late for the corn and will only help the beans so much. IASG’s Ag CTA index is a positive 7.63% in June and all indications are July will post a positive month as well (Past Performance is not indicative of future results).
These rallies outside of the Equity market are what have inspired this article highlighting a term we all know and consider but may need to pay even closer attention to, diversification. The entire foundation of the investment industry is based on the idea that an uncorrelated and well diversified portfolio should allow you to minimize risk and maximize potential return. The idea that over the past few months diversification should allow you to weather an over exerted equity market due to profits made in the Energy or Ag market. At the end of the day we are all speculating as none of us can predict what lies ahead but there are tools that can be utilized to more effectively position yourself for the future.
IASG offers correlation analysis tools as well as a portfolio blending feature that can be very empowering products as you explore your options and the risk/return involved. For questions regarding these tools, a specific CTA or this asset class in general, please feel free to contact me by phone (312)913-9603 or email at tresch@iasg.com.