Sell Everything and Buy Stocks Part 2

Unlike the thousands upon thousands of potential investors whom forced themselves to click on the “Scary Parallel” chart overlaying the 1929 & current Dow Jones Industrial Average, the concept seems like fear mucking propaganda produced to push people out of the market. Reformed Broker said it best last week with a post titled “The Chart that won’t Die,” explaining why such a chart is illogical and flawed.

What we won’t ignore is the stock markets unprecedented stretch to all time highs this week. But while everyone else is evaluating the valuations of the stock market itself, we’re looking at things a bit differently – and analyzing how far the thing needing diversification from (stocks) has out run the diversifier (alternatives)…  We’re interested in analyzing how the S&P 500 is performing relative to managed futures.

Now, this is somewhat of a strange comparison – as managed futures as a whole is non-correlated to the S&P, meaning we shouldn’t expect managed futures to be running up to new highs right alongside S&P; but how far the non crisis period investment runs ahead of the crisis period investment is a bit telling in our opinion – especially when looked at over the past 20 years where three distinct cycles appear.

Stocks and Managed Futures(Disclaimer: Past performance is not necessarily indicative of future results.
The graph above depicts the total return of each asset class since 1993, with the listed ‘amounts’ the difference between such total returns as of the dates listed.)

We’re well into the third cycle of the past 20 years now – and the amount of over-performance of the S&P 500 over managed futures has set a new record, surpassing the old record back in August 2000, to stand at 281% (that’s the difference between the total returns since January 1993, with stocks currently standing at +449% and managed futures at +167%).

The million dollar question is whether this outperformance will last, or whether we’ll see stocks come down to managed futures and managed futures come up to stocks as they did in 2001/2002 and 2007/2008 {past performance is not necessarily indicative of future results}.  We can see that stocks overshot the downside a bit, actually falling below managed futures total return a short 5 years ago, and maybe that means they’ll overshoot on the top side as well.

We half-jokingly said to sell everything else and buy stocks in a newsletter back in late 2012 (and we actually should have – with stocks up 46.7% since then), and this move to new all time highs (again) feels a lot like that period where things are getting a bit stretched and a reversion to the mean is overdue. The cool thing is – that doesn’t necessarily mean a sell off for stocks (although that is definitely on the table as we saw at the beginning of February); a contraction in the outperformance of stocks over managed futures could just as easily be managed futures going up more than stocks for a while, as it could be managed futures going up while stocks go down as has happened in the past crisis periods.

We would be remiss if we didn’t mention the total return comparison above ignores risk… A switch to an ‘underwater equity curve’ which shows the amount of loss each asset class experiences before going back into positive territory; highlights how that big outperformance comes with much, much higher risk in terms of the max amount of pain investors must endure.

Underwater Equity Curve(Disclaimer: Past performance is not necessarily indicative of future results)

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Disclaimer
The performance data displayed herein is compiled from various sources, including BarclayHedge, and reports directly from the advisors. These performance figures should not be relied on independent of the individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or not the performance includes proprietary results, and other important footnotes on the advisor's track record.

Benchmark index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices such as survivorship, self reporting, and instant history.

Managed futures accounts can subject to substantial charges for management and advisory fees. The numbers within this website include all such fees, but it may be necessary for those accounts that are subject to these charges to make substantial trading profits in the future to avoid depletion or exhaustion of their assets.

Investors interested in investing with a managed futures program (excepting those programs which are offered exclusively to qualified eligible persons as that term is defined by CFTC regulation 4.7) will be required to receive and sign off on a disclosure document in compliance with certain CFT rules The disclosure documents contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA, as well as the composite performance of accounts under the CTA's management over at least the most recent five years. Investor interested in investing in any of the programs on this website are urged to carefully read these disclosure documents, including, but not limited to the performance information, before investing in any such programs.

Those investors who are qualified eligible persons as that term is defined by CFTC regulation 4.7 and interested in investing in a program exempt from having to provide a disclosure document and considered by the regulations to be sophisticated enough to understand the risks and be able to interpret the accuracy and completeness of any performance information on their own.

RCM receives a portion of the commodity brokerage commissions you pay in connection with your futures trading and/or a portion of the interest income (if any) earned on an account's assets. The listed manager may also pay RCM a portion of the fees they receive from accounts introduced to them by RCM.

See the full terms of use and risk disclaimer here.

Disclaimer
The performance data displayed herein is compiled from various sources, including BarclayHedge, and reports directly from the advisors. These performance figures should not be relied on independent of the individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or not the performance includes proprietary results, and other important footnotes on the advisor's track record.

Benchmark index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices such as survivorship, self reporting, and instant history.

Managed futures accounts can subject to substantial charges for management and advisory fees. The numbers within this website include all such fees, but it may be necessary for those accounts that are subject to these charges to make substantial trading profits in the future to avoid depletion or exhaustion of their assets.

Investors interested in investing with a managed futures program (excepting those programs which are offered exclusively to qualified eligible persons as that term is defined by CFTC regulation 4.7) will be required to receive and sign off on a disclosure document in compliance with certain CFT rules The disclosure documents contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA, as well as the composite performance of accounts under the CTA's management over at least the most recent five years. Investor interested in investing in any of the programs on this website are urged to carefully read these disclosure documents, including, but not limited to the performance information, before investing in any such programs.

Those investors who are qualified eligible persons as that term is defined by CFTC regulation 4.7 and interested in investing in a program exempt from having to provide a disclosure document and considered by the regulations to be sophisticated enough to understand the risks and be able to interpret the accuracy and completeness of any performance information on their own.

RCM receives a portion of the commodity brokerage commissions you pay in connection with your futures trading and/or a portion of the interest income (if any) earned on an account's assets. The listed manager may also pay RCM a portion of the fees they receive from accounts introduced to them by RCM.

See the full terms of use and risk disclaimer here.