Flash Commentary 2.7.14

The first month of 2014 has now ended and the contrast to 2013 could not be starker. The S&P 500 Index experienced its worst monthly showing since May of 2012. This result reflects a sharp reversal from 2013, where the S&P 500 Index produced its 4th best calendar year in fifty years. Common explanations for 

January’s weakness included bad economic data from China and the announcement of another round of Fed tapering. Both those developments were widely anticipated, and most likely a dose of old fashioned profit taking also played a role.  

But negative market performance for U.S. Equities is not the only story. Volatility, measured through traditional metrics, has returned to levels not seen since mid-2013. For example, the VIX index, reflecting volatility in the U.S. equity markets, closed on February 3rd at more than 21.0. That value reflects more than a 50% increase from year-end 2013, and is only the second time it has crossed 21.0 since June 2012.

A key component of the AlphaSector value proposition is the goal of de-risking in times of market distress. While a bad month does not normally qualify as “market distress,” the combination of market declines and volatility increases does stand out and bears watching. January’s market events have already begun to impact the AlphaSector U.S. Equity Indexes1 positioning. 

AlphaSector U.S. Equity Indexes entered 2014 with eight sectors on and only the Utilities sector off. By the end of January, in reaction to downward trends in prices and broad-based increases in volatility, the model triggered negative signals for two additional sectors, bringing the total of sectors turned off to three. Exiting more than one sector in a single day is a relatively rare event for these Indexes, having only happened five times since 2010 in the AlphaSector Premium Index. Further, having three sectors off is the most defensive position for the U.S. Equity Indexes since the end of 2012. 

To be clear, at January end, the AlphaSector U.S. Equity Indexes were still 100% allocated to equities with no short-term Treasury ETF exposure. The Indexes shift to short-term Treasury exposure when six or more sectors are turned off.  When six sectors are off, the U.S. Equity Indexes would have a 25% position in a short-term Treasury ETF.   Please see final pages for important information. 

1 - AlphaSector US Equity Indexes include AlphaSector Premium Index, AlphaSector Rotation Index, and Premium AlphaSector Index.

The commentary provided was authored by F-Squared Investments and is used with permission.  Past performance of an index or an algorithm is not a guarantee of future results. The views expressed in the referenced materials are subject to change based on market and other conditions. These documents may contain certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks or estimates are based upon certain assumptions and should not be construed as indicative of actual 

events that will occur. The information provided herein does not constitute investment advice and is not a solicitation to buy or sell securities.

This material has been prepared solely for informative purposes. The information contained herein includes information that has been obtained from third party sources and has not been independently verified. It is made available on an "as is" basis without warranty. 

 “AlphaSector ®” is a registered trademark of F-Squared Investments, Inc. and is used with permission. This material is proprietary and may not be reproduced, transferred or distributed in any form without prior written permission from RPg Asset Management and F-Squared Investment Management, LLC or one of its subsidiaries (collectively, “F-Squared Investments” or “F-Squared”).  F-Squared reserves the right at any time and without notice to change, amend, or cease publication of the information. 

Investment products that may be based on AlphaSector Indexes are not sponsored by F-Squared, and F-Squared does not make any representation regarding the advisability of investing in them. F-Squared serves as the model provider to RPg Asset Management. There is no guarantee that an investor’s account will achieve its objectives or avoid losses. Inclusion of a mutual fund or an exchange traded fund in an index does not in any way reflect an opinion of F-Squared regarding the investment merits of such a fund, nor should it be interpreted as an offer of such a fund’s securities. None of the mutual funds or exchange traded funds included in an index has given any real or implied endorsement or support to F-Squared or to this index. One cannot invest directly in an index. 

All AlphaSector Indexes represented in this material do not reflect the actual trading of any client account.  No representation is being made that any client will or is likely to achieve results similar to those presented herein. F-Squared Investment Management, LLC or one of its subsidiaries is the source and the owner of all AlphaSector Indexes, and their performance information. 

The AlphaSector U.S. Equity Index (“U.S. Equity”) is designed to provide exposure to the U.S. Equity market, and is constructed as an “asset allocation” overlay onto Exchange Traded Funds (“ETFs”) representing major sectors of the U.S. economy. F-Squared defines the inception date for U.S. Equity, the Premium AlphaSector Index and the AlphaSector Rotation Index as October 1, 2008.

The primary goal of downside risk management is to avoid investment losses during negative markets by delivering risk controls that reduce market exposure and re-allocate exposure to a cash alternative (short-term treasury ETF).

F-Squared defines “de-risking” as reducing exposure to a given asset class by re-allocating to a cash alternative (short-term treasury ETF). AlphaSector Indexes may de-risk or re-risk in response to market conditions as determined by our disciplined quantitative models. Although the goal of “de-risking” is to avoid losses it is subject to its own risks, including loss of principal. The allocation to the short-term treasury may underperform the returns of the asset class. Short-term treasuries offer little opportunity for capital appreciation. 

The information contained in this document is current as of the date presented unless otherwise noted.  

Sources: Morningstar, F-Squared Investments as of February 7, 2014 All rights reserved. 

References to Non-AlphaSector Indexes 

The S&P 500 Index is a broad-based unmanaged index of 500 stocks, which is widely recognized as a representative of the equity market in general.

For more information including risks of investing in our strategies, visit our website at www.rpgassetmanagement.com 

For more information on F-Squared and the AlphaSector Indexes, please visit www.f-squaredinvestments.com