Oct 21, 2014 | Post by: Roman Chuyan, CFA Comments Off on U.S. Equities: Out Of The Woods?

U.S. Equities: Out Of The Woods?

What a difference a week can make! Equities globally are now rebounding, with the S&P 500 having reclaimed almost half of its recent drop. This volatility has challenged many tactical investment managers who want to protect against significant downside in order to avoid the 2008-like disaster. Last week in the markets certainly “felt” like it was the summer of 2011, if not the winter of 2007.

To protect against significant downside, many managers adopted technical indicator-based stop-loss, or risk-management systems. Unfortunately, such systems amount to selling low and buying high, with performance loss from “whip-saws” over time far outweighing expected protection from that one bad outcome that may eventually materialize.

Based on our research and modeling here at Model Capital, we are convinced that fundamentals drive markets. Thus, we use our fundamentals-based tactical asset allocation model in order to protect against significant downside. This forward-looking model is designed to detect significant, systemic downside (as well as upside) –  and it currently doesn’t see a significant downturn. As I described in this recent post, U.S. economic fundamentals are very strong. The S&P 500 valuation is somewhat above average, but not by any means extreme. Q3 earnings are coming out strong.

Are we out of the woods now? There may be more “bad news” which may cause more volatility and set the market back a bit. But since we know, based on our models, that this is likely not a systemic downturn, we expect the market to recover quite strongly.


Model Capital Management LLC is an investment firm focusing exclusively on tactical investment management. Please visit the following web pages for more information on Model Capital’s approach to tactical management and our tactical asset allocation strategies.

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