Good Junk

Last week’s “Risk On” mood was most clearly demonstrated by the chart above which shows that despite the jump in rates, high yield debt, (Junk) out-performed the TLT in both the short and longer-term measures.

Not surprising, all four key U.S. equity markets also continued their relentless climb up, +.5% (on average) shrugging off what would normally be considered lousy news.

A failed summit with North Koreans and the Cohen spectacle on the Hill was the entertainment for the week. I can’t wait for next week’s “news”.

Let’s not forget tensions are still high in the Himalayas between India and Pakistan. Even with Pakistan releasing a captured Indian pilot the threat of a nuclear confrontation is still possible.

Even that did not mitigate the big jump in rates that gold despises.  The disconnect between rising stocks and rising metals seems to have been resolved for now in favor of equities.

This week’s highlights are:

  • All four (SPY, DIA, QQQ, IWM) benchmarks are above their 200 DMA’s
  • Risk On metrics improved
  • Market Internals weakened slightly as price action was positive
  • Sentiment (VXXB) is very positive and close to frothy
  • Gold and Gold Miners both had major reversals and sold off hard
  • Biotech (IBB) and Semi’s (SMH) continue to lead the rally
  • High Yield Debt (HYG) gained ground versus U.S. treasuries
  • Weekly momentum for equities is still a headwind

On another note, some pundits have been concerned about the concentration of leading equities to returns of the benchmark stocks indexes.

However, this concentration has always existed, and It remains a constant statistical anomaly that generates Alpha.  Momentum combined with relative strength outperforms the indices and this year will likely be no different.

In fact, over time if you removed the top five stocks from the S &P 500 since 1995 your returns would have dropped by 2.6% annually. (based on a report from AQR’s CEO Cliff Asness with $196 billion AUM).

This doesn’t come as any surprise to us. Our All Stars trading model which has out-performed the QQQ by 3x and the SPY by 10x since 2008 takes advantage of this market condition.