Flash Commentary 10.14.14

Market Status - Backdrop

Ebola outbreaks, Middle East combat, Probable European recession, China economic slowdown, global energy recession. These are all major issues that can each cause a global market correction, and they are all happening at once. These are the significant issues of this fall, and the global markets have reacted accordingly.

The Eurozone (as represented by the MSCI EMU Index) peaked in mid-June, and has slid since then. Emerging Markets (MSCI Emerging Markets Index) did rather well coming into September, hit their peak on September 3rd and is down since then. Japan (MSCI Japan Index) was having a relatively bad year through its bottom in late March, rallied through late September to be flat, but has since turned negative.

The U.S. equity markets (S&P 500 Index) fared well through early September, and peaked on September 18th. The recent market turmoil however has given up most of those gains year to date through October 14th.

Implications for AlphaSector Premium Index

The most important consideration impacting our investment decision-making in the AlphaSector methodology is volatility, followed by price momentum trends. As stated above, there is a global increase in volatility and negative price momentum over the past few months, that has accelerated over the past several weeks. Based on the most recent signals, AlphaSector started to de-risk by eliminating some sectors that are deemed as having too high a likelihood of future losses, and reallocating to healthier sectors. An example would be Energy, which has been “off” in the AlphaSector Index for many weeks now. If there is a continuation in the overall negative market trends, one can expect more aggressive de-risking within the AlphaSector Indexes, potentially leading to meaningful allocations to Short-term Treasury ETFs.

September ended with the AlphaSector Premium Index taking on an increasingly defensive position, eliminating two of nine sectors (Energy & Utilities). Based on the most recent signals, another sector was removed, leaving the AlphaSector Premium Index allocated to just six sectors. Notable however are that five of the remaining six sectors were exhibiting signs of increased volatility and/or negative price momentum. An allocation to less than four sectors is a key point for the methodology, as it is the fewest number of sectors the AlphaSector Premium Index can have without holding a Short-term Treasury ETF position.

The AlphaSector methodology is explicitly not oriented to capturing excess relative returns, but instead to identify times when downside protection is warranted – in other words, when is it time to start looking for “higher ground.” By design, the AlphaSector Premium Index has the ability to de-risk in the face of rising market stresses and risks. The coming weeks and months will unveil whether that capacity is a nice option, or a required means of protecting investors.

The views expressed are as of October 14, 2014, and 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 in this material are forward-looking statements and are based upon certain assumptions and should not be construed as indicative of actual events that will occur.

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