Bonds Continue To Outperform

It has been around 9 months since the current market selloff began during the summer of 2015.  U.S. stocks have been on a bit of a roller coaster ride since then with several sharp declines and snap-back rallies.  While U.S. stocks have shown some improvement recently, U.S. bonds still hold the top performance slots and stocks remain quite a bit below 10-year Treasuries.  Do you need any Treasury Bonds in your portfolio?


Performance data calculated by  Performance data is based on Total Return calculations but does not include other potential costs.

Performance results are hypothetical.  Investments and the income derived from them fluctuate both up and down.  This presentation is for informational purposes only and is neither an offer to sell or buy any securities.  Benchmarks or other measures of relative market performance over a specified time period are provided for informational purposes only.  The material provided herein is for informational purposes only and is not an offer to buy or sell any security.

No investment recommendations have been made in this article. Investing involves risk including the loss of capital. Conduct your own research before making any investment decision.


How Real are Current S&P 500 Earnings?

Aggregate corporate earnings are the primary driver of stock market valuations and are communicated as “Reported Earnings” based on GAAP (generally accepted accounting principles) and “Pro-Forma” which exclude certain on-time or extraordinary items.  The problem is corporations are reporting these “special, one-time” items excluded from pro-forma earnings quarter after quarter leaving investors with an unclear picture of what the company is really earning.  This has led 90% of current earnings reports to be based on “pro-form” earnings with GAAP based earnings reported in the back of the quarterly report.  A couple decades ago it was the opposite, the majority of earnings reports were based on GAAP.  It is starting to sound like corporate America has taken a cue from the political class where manipulation, deceit and obfuscation rule the day.

Eventually the accounting trickery reach their effective limit and that point may have arrived.  2015 “pro-forma” earnings rose 0.4% over the prior year marking the weakest growth since 2009.  This is based on pro-forma figures.  GAAP earnings fell by 12.7% and the spread between GAAP versus pro-forma earnings is wider than anytime since 2009.


Another factor to take into consideration as the market tries to climb out of what has been a mild correction so far.


An Upside Trigger for Stocks may be Approaching

If stocks continue to rally they won’t have to move much higher to trigger a signal for my Adaptive Growth strategy.  This is a strategy that uses a timing base mechanism to determine whether the strategy should own stocks or cash.

Here is a picture of the current state of the trigger.


If he black line moves above the blue line it is usually a good indication stocks are about to resume a long-term uptrend.  There is always a chance during a transition period (where lines have recently crossed) the indicator will reverse course after crossing . We saw that happen back in the fall.  The first dip below the blue line was based on the mid-summer selloff.  The August Flash-Crash sent the black line much lower but stocks quickly recovered for a short time only to fall below it again at the end of 2015.  Aside from the reverses that can happen around an initial trigger this has been a very reliable indicator for both avoiding sustained declines and staying invested during more mild corrections.

Here is what the indicator looked like back in 2007-08.


I have to apply a bit of discernment when a trigger arrives.  Currently this recovery rally is not all that convincing so I am willing to be a little patient if the black line does move above the blue line in the near future.  Even getting back into the market a couple points past where the lines cross I should be able to enter below the highs back in mid-2015 if the current uptrend continues its course.

Past Commentary

Due to an abrupt service change by my website hosting company, I had to move my website and blog during the month of February.  The website transition went very smoothly but porting over years of blog posts is a different matter altogether.  Although I have provided a lot of market and investment commentary over the years I have decide that I am going to start a new blog and not bring over the old content.  I have access to the old content and at some point I might change my mind and decide to bring some over but at this point there is no plan to do so.

Welcome To Market Insights

The purpose of Market Insights is for Dightman Capital to be able to share more information about the state of investment markets through the results of various portfolio strategies.  We hope this will introduce some helpful concepts around investment growth and risk management.

Occasionally we might dig into the “why”, but most of the time we will be content to deliver the what.  As in, what is the current state of different investment strategies and what part of the investment mix can be attributed to current performance.

The biggest point we hope to drive hope is, a traditional mix of stocks and bonds may only be appropriate for part of an investors portfolio.  Incorporating a simple timing based system along with a unique mix of traditional stocks and bonds may provide a more complete solution for those investors looking for potentially superior risk adjusted returns.