April 2019

"Q3 Monthly Update"

  • Strong April equity performance.
  • New all-time highs in Q3 strategies.
  • ETF version of flagship strategy.

Q3 Performance Update

US equities posted solid gains in April and hit another record high late in the month. A dovish stance by the Fed and positive economic data are considered to be the impetus for the rise. The S&P 500 gained 3.9%, the Nasdaq added 5.5%, and the Dow rose 2.6%. The relative underperformance of the Dow is largely due to single-stock performance in a smaller universe of 30 stocks.
Sectors were mixed, as Financials (XLF) surged 9.0% and Communication Services (XLC) rose 7.1%. On the losing side were Health Care (XLV) shedding 2.7% and Real Estate (XLRE) dropping 0.5%. A range of over 10% from best to worse performing sector is certainly wide for one-months’ time, but this spread enables our Sector-based models to shine as they attempt to avoid the laggards and invest in the leaders.
Fixed income markets finished April flat to down. The Aggregate Bond (AGG) lost 0.2%, while long-term Treasurys fell 2.0% on positive economic data. High Yield (HYG) moved upwards 1.0% on the strength of the equity market. April saw much less talk of an inverted yield curve as longer-term bonds saw their yields creep up, as shorter-term yields dropped a bit.
Sector rotation strategies excelled in April as the overweighting in Tech-related sectors continues to bolster performance. Defensive sectors, such as Real Estate and Energy have all but disappeared from sector strategy holdings, as they struggle to perform. Asset Allocation strategies have also benefited from a concentration in Technology and Consumer Cyclical holdings. As these strategies tend to be more diversified, some do hold defensive and alternative positions which was a small drag on performance for the month. Tactical approaches were mixed, as expected, since some require a pullback before entering, and others look for a trend.

Q3 Strategy Update – New All-Time Highs

As of the end of April, the following strategies have all registered new all-time highs:

  • Adaptive High Yield
  • Managed Income Rotation
  • Tax Advantaged Income
  • EA Sector Conservative/Moderate
  • Faith Based Conservative
  • SA Sector Moderate
  • Tactical SPX
  • TUG0 / TUG1
  • Voyage Growth

Our three income-based strategies continue to benefit from a nice run in High Yield bonds since the beginning of the year, as well as avoiding several periods in which Government bonds struggled. Most of our equity-based strategies shifted to a defensive stance in December. And while, in some cases, they stayed in that posture when the market began to rally, missing that one down month directly led to the new highs they are now experiencing.

Q3 Strategy Focus

Enhanced Sector / Strategic Sector ETF

In response to several requests, we recently began running ETF versions of our popular Fidelity fund-based sector strategies. We have “cloned” both EA and SA Sector into new ETF strategies: Enhanced Sector ETF and Strategic Sector ETF. Both of these use the exact same methodology as the original strategies and take their trades from them as well. When we have trades generated from EA or SA we use a corresponding ETF to take the place of the Fidelity fund that we would normally use.

In choosing the appropriate ETF we spent a considerable amount of time looking at liquidity, spreads, expenses and correlations. Our intention was to find ETFs that match up or correlate the best to our existing universe of Fidelity funds. However, we also took into consideration any trading impact there might be, based on an ETFs liquidity.

In the short-term, performance may vary between the fund and ETF strategies. Over time, though, we fully expect that they will move in tandem as small differences in performance between holdings will tend to cancel each other out.

Q3 Market Research

With April’s gains, stocks have surged to their best start for a year in 32 years. But markets do not have a good track record of following up on a rally of that size. There are four other years since World War II that the S&P 500 was up at least 15% to begin the year. Three of those years were virtually flat during the following six months. The other was 1987 when the S&P 500 lost nearly 15%.
A portion of this phenomenon may be explained by simple mean reversion – the market is bound not to continue at that pace for subsequent months. Also, the six months in question are the “…go away” part of “Sell in May and go away”, so there may be seasonal factors as well.

Going into May, many Q3 Tactical strategies have not signaled as many trades as would normally be expected. The lack of market pullbacks is a large part of the reason. Other than this year, there have only been three prior years that the S&P 500 has had 10 or fewer days where it closed below its 10-day moving average.

The need for a pullback to generate a signal is emblematic of the reason we stress using multiple strategies within an account. The use of multiple strategies, even if they are all Tactical, provides additional diversification as not all strategies require a pullback. Many of our Tactical models look for trends as their signal, and our Asset Allocation approaches use relative strength among other indicators for their signals.

All the best,

Bruce Greig, CFA, CAIA






Advisor Use Only. The Advisor Insight Newsletter may provide general investment information from sources deemed reliable but is in no way a solicitation to buy or sell any security. Past performance is not indicative of future results. Data is provided for informational purposes only and should not be construed as investment or tax advice. Performance data is based on monthly balances and reflective of model accounts held at Trust Company of America. Performance on other platforms may vary based on a number of factors including available fund universe and trade cut off times. Any “gross of fees” performance data is for Investment Adviser Representative use only and cannot be used with investors. In such a case, performance does not reflect the deduction of advisory fees and a client’s return will be reduced by the advisory fee and any other expenses incurred on the account. “Gross of fees” performance does not reflect the impact that fees have on the compounding effect of returns. Details on Q3’s fees are outlined in our ADV Part 2 brochure, which is available upon request. There is no assurance that objectives will be realized. There is risk of loss with all of Q3 Asset Management's investment strategies. Any reference to or use of the term 'registered investment advisor' does not imply that Q3 Asset Management or any person associated with Q3 Asset Management has achieved a certain level of skill or training. For additional information please see Q3 Asset Management Corporation's ADV, which is available upon request.