Market Notebook

Both bond and equity prices were in retreat last week, with prices closing at or near areas of potential technical support.

Given geopolitical uncertainty, inflationary concerns, and supply chain disruptions, US equity prices have held up well. As measured by ticker SPY, Equities closed the week near both the 20-day exponential moving average and the 200-day moving average. The short-term uptrend that began on March 15 is still intact but strained. Over a longer time frame, equities could still be considered to be in consolidation as prices remain above the February 24 lows.

During the week ahead, it seems prudent to be cautiously optimistic about US equity prices, given they remain in a wide area of consolidation. Since the fundamental picture appears challenged, it also seems prudent to look for increased volatility, especially to the downside.

Bond prices appear to be in a solid downtrend and have been for a while. Interestingly, as measured by ticker BND, bond prices are very near the lows set on October 29, 2018. Many short-term traders consider areas of significant lows such as this one to be areas of support. It will be instructive to see if this important low is breached or if bonds can consolidate in this area and hold support.

The strong downward trend in bond prices suggests avoiding bond purchases unless necessary during the coming week.

Regarding portfolio construction, we have begun researching a family of ETFs created by Simplify Asset Management. Several of their ETFs use convexity to efficiently hedge for specific risks like interest rate risk or the risk of significant moves down in equity prices. Such ETFs can also be used to express specific views within portfolios. While these products are relatively new, they are intriguing. All hedges tend to have a cost, but if such hedges can be more efficiently executed, their use becomes more attractive. More on this as this family of ETFs is reviewed.

As a technical note, a Sahm Rule Recession Indicator has been added to the economic indicator section of the notebook.

All the best in the week ahead.

Disclaimer: Nothing in this discussion should be considered investment advice. The content of this discussion is strictly my personal opinion and subject to change at a moment’s notice. Investment advice can only be provided to you by your investment professional and not by a general market discussion such as this one. If you wish to speak with an investment advisor, contact us. We can probably help.