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Index Research

Relative Strength Investing Trends: 30-Year Rates Hit All-Time Low

Relative Strength Investing Trends: 30-Year Rates Hit All-Time Low | We take a look at why investors should consider a flexible approach to fixed income exposure in light of the recent decline in yields, which resulted in 30-year rates hitting a new all-time low.

We take a look at why investors should consider a flexible approach to fixed income exposure in light of the recent decline in yields, which resulted in 30-year rates hitting a new all-time low.

What’s Hot…and Not

How different investments have done over the past 12 months, 6 months, and 1 month. Never before has it been easier for investors to invest in the strongest trends wherever they might be found in the world. Relative strength offers a disciplined framework for allocating among those trends. Markets are global and your portfolio should be too. As of 2/24/20:

Relative Strength Feb Chart 1

Past performance is not indicative of future results.

See disclosures in Appendix A, which includes the ETFs and Indexes used for this performance table. Performance numbers include dividends but do not include all transaction costs. Investors cannot invest directly in an index. Indexes have no fees. Past performance is not indicative of future results. Potential for profits is accompanied by possibility of loss.

Fund Flows

Total estimated inflows to long-term mutual funds and net exchange traded fund (ETF) issuance collected by The Investment Company Institute.

Relative Strength Feb Chart 2

See disclosures in Appendix A.

Sector and Capitalization Performance

Relative Strength Feb Chart 3

Past performance is not indicative of future results.

See disclosures in Appendix A.

High RS Diffusion Index

As of 2/24/20:

Relative Strength Feb Chart 4

The 10-day moving average of this index is 76% and the one-day reading is 51%. Pullbacks in this index may provide good opportunities to add to relative strength strategies.

See disclosures in Appendix A.

Relative Strength Spread

The chart below is the spread between the relative strength leaders and relative strength laggards (universe of mid and large cap stocks). When the chart is rising, relative strength leaders are performing better than relative strength laggards. As of 2/24/20:

Relative Strength Feb Chart 5

RS leaders have been performing better than the RS laggards in recent weeks as reflected in the rising RS Spread. A rising RS Spread reflects an environment that tends to be generally favorable for relative strength strategies.

See disclosures in Appendix A. 

30-Year Rates Hit All-Time Low

Several months ago, I posed the following question to our Senior Portfolio Manager, John Lewis, CMT.  I think his answer is insightful given the recent collapse in yields.

What is the argument for taking a tactical approach to fixed income in the years ahead? 

Rates have fallen to historically low levels.  When they start moving back up again it will be painful for a lot of bond investors.  The key part of the previous sentence is, “when.”  Nobody knows when rates will move higher for good.  It might happen soon, or it could be years from now.  Being able to invest in fixed income opportunities gives us the ability to change the risk profile of the portfolio for different interest rate regimes.  When rates move higher, we can de-risk the strategy and preserve the capital we accumulated when rate moves were favorable.  Of course, we can’t get our rate calls right every time!  We use a trend following model to tell us when to put risk on and when to take it off.  We rely on the market to tell us whether our positioning is correct or not.  We really like that approach in these uncertain fixed income markets.  We feel that a flexible approach to fixed income is something investors should consider because the interest rate environment looking out the next 3-5 years seems so uncertain.

John’s response underscores the need to have a flexible approach to fixed income allocations given our current environment.

In our Tactical Fixed Income strategy, which we have been managing for nearly 7 years now, the allocation of the strategy is broken down in sleeves.  In each of the sleeves, we evaluate two different bond classes from a relative strength perspective and based on that comparison, one of the bond classes is chosen.  For example, for 20% of the portfolio we compare the strength of Long Term U.S. Treasuries to U.S Treasury Inflation Protected Securities.  Whichever is stronger goes into the portfolio.  For the next 20% of the portfolio, we compare Long Term U.S. Treasuries to Short Term U.S. Treasuries.  Each of the sleeves is shown below.  What happens in one sleeve has no bearing whatsoever to what happens in another sleeve.  All exposure is achieved through ETFs in this strategy.  The key to this strategy is to objectively execute based on what is actually happening in the market, rather than investing based on any forecast.

Relative Strength Feb Chart 6

In recent days, we have seen the 30-year yield move to all-time lows as reflected in the chart below. Bond prices move inversely to yields.

Relative Strength Feb Chart 7

Source: FactSet, 2/24/20

We continue to believe that investors may benefit for incorporating a tactical approach to fixed income exposure in order to seek to capitalize when rates are declining, but also to have the flexibility to adapt if and when interest rates move higher.

If you would like to learn more about our Tactical Fixed Income strategy, which is available on a number of SMA/UMA Platforms, contact us using the form below.

Dorsey, Wright & Associates, LLC, a Nasdaq Company, is a registered investment advisory firm. Registration does not imply any level of skill or training.  Neither the information within this email nor any opinion expressed shall constitute an offer to sell or a solicitation or an offer to buy any securities, commodities or exchange traded products. This communication does not purport to be complete description of the securities or commodities, markets or developments to which reference is made.  The relative strength strategy is NOT a guarantee. There may be times where all investments and strategies are unfavorable and depreciate in value. Relative Strength is a measure of price momentum based on historical price activity. Relative Strength is not predictive and there is no assurance that forecasts based on relative strength can be relied upon to be successful or outperform any index, asset or strategy.  In all securities trading there is a potential for loss as well as profit.  It should not be assumed that recommendations made in the future will be profitable or will equal previous performance.  Investors should have long-term financial objectives. There are risks inherent in international investments, which may make such investments unsuitable for certain clients. These include, for example, economic, political, currency exchange, rate fluctuations, and limited availability of information on international securities.  Past performance, hypothetical or actual, does not guarantee future results. In all securities trading there is a potential for loss as well as profit. It should not be assumed that recommendations made in the future will be profitable or will equal the performance as shown. Investors should have long-term financial objectives.  Advice from a financial professional is strongly advised.

Other Relative Strength Sources

  • Brush, John S. "Eight Relative Strength Models Compared." Journal of Portfolio Management (1986). 
  • Berger, Israel, Moskowitz. "The Case for Momentum Investing." AQR Capital Management. 2009.
  • Jegadeesh and Titman. "Returns to Buying Winners and Selling Losers." Journal of Finance (1993).
  • O'Shaughnessy, James P. What Works on Wall Street. McGraw Hill, 1997.

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