Monthly Commentary February 2014

Up here in the Northeast, after a long, tough winter, we are hoping that the weather in March will fulfill the old adage and come in like a lion and leave like a lamb. Fortuitously, the capital markets seem to be a month ahead, because it was the equity markets in February that arrived as a frightening beast, yet left as a friendly one. February began ominously. The S&P 500 was down on the first day of trading, adding to January’s losses, it’s worst monthly performance in 19 months. Although the S&P 500 would end that first week with a small gain, the stress on the market was almost palpable. 

Economic news from both home and abroad was weak, corporate earnings were disappointing, and the looming inevitability of Fed tightening cast a shadow over all. Increasing volatility appeared to define the market. But then the U.S. equity markets took a strong turn for the better and the S&P 500 Index finished the month with a positive gain, fully regaining the ground lost in January. In fact, when looked at across most of the major asset classes, February was one of the “friendliest” months seen in a long time. 

Implications for AlphaSector Indexes and Strategies

The most important consideration impacting the investment decision-making in the AlphaSector methodology is volatility, followed by price momentum trends. For many of the equity and sector ETFs that F-Squared tracks, the beginning of February showed negative indications from both. 

Since a short-lived peak in January, global markets had fallen while volatility had risen – an often toxic combination. January had thus ended with the AlphaSector Indexes and strategies taking on an increasingly defensive position. For example, the weekly AlphaSector U.S. Equity indexes, eliminated three of nine sectors. By the beginning of the second week of February, it had dropped another two, leaving the index allocated to just four sectors with five removed. An allocation to only four sectors is a key point, as it is the fewest number of sectors that the Index can have without holding a Short-term Treasury ETF position. Because the maximum holding for a single sector is limited to 25%, if another sector had turned off it would have re-allocated the proceeds to a Short-term Treasury ETF position, a significant de-risking step for the U.S. equity index.

But then conditions improved. Volatilities started to recede. Perhaps even more significantly, prices recovered, with the S&P 500 up during the second week in February.  From a posture of cautiously but purposefully de-risking the AlphaSector indexes at the start of February, it shifted to cautiously re-risking and re-entering the markets by mid-month. In the flagship AlphaSector U.S. equity index it stepped back from the precipice and added a sector, leaving five “on” and four “off.” 

It would be an exaggeration to say that the capital markets ended February as health as they could be, new highs in the S&P 500 notwithstanding, or that we ended the month as optimistic as we could be. In truth, although February was a great improvement over January, we believe the state of the markets entering March is still fragile.

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.

Past performance is not indicative of future results. 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.

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.

Sources: Morningstar, F-Squared Investments. All rights reserved. 

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