EMMA Program was up 0.9% in April and 11.4% YTD.
We wrote two weeks ago about the mixed signals (Signal Overload: Market in Transition
). Our flattish performance reflects the seesawing of headlines and sentiment. We got hammered by the trade war related crash in meats but benefited from a short soybean hedge and took advantage of a massive rebound in meats from softening rhetoric. We got squeezed by a rally in gasoline but implemented a timely crude long hedge to contain the damage. Our risk-off long gold position continues to haunt us but we caught a reprieve in the breakdown of palladium.
April saw stabilization of the stock market and the return of some risk appetite. 10Y treasury yield briefly cracked the psychological 3% before backing down; trade war threat cooled off some and NAFTA negotiation made progress; North Korean de-escalated while the Middle East escalated; VIX calmed down and US dollar blasted off to the upside. Many issues that worried investors in 1Q18 seem to be reversing.
It bears repeating that our trade setup is based on asymmetrical risk profile and the three-legged stool: fundamentals, sentiment, and technical. Their importance varies in degree from time to time – sometimes one can overwhelm the other two. For now we give more weight to the latter two due to the risk-off overhang. That is why we’re holding on to our long gold and long volatility positions in anticipation of an asymmetrical payoff. We don’t know how equity markets are going to hold up but we stand ready to catch either direction.
Speaking of stock markets. We don’t usually pay attention to their daily fluctuations but lately it has become an important gauge on sentiment. We pay particular attention to how heavyweight stocks react to continued strong earning blowouts, how stock markets close during the last hour, and how VIX tracks stock market movements. Since our ongoing thesis is that markets are now responding to macroeconomics and geopolitical events, we have to keep an even closer eye on shifting correlations and sentiment.
Something very unusual is happening in the currency market too. As of this writing, Yen, Euro, Pound, Swiss Franc, Aussie Dollar, S. African Rand are all in oversold territory. The chart below shows the strength of US dollar against each since peaking after the 2016 election and bottoming in Feb 2018. Given that there is a mixture of economic growth, safe haven, natural resources, emerging markets, and inflation stories here, the relative performance of each currency can shed some light on how much weight investors are giving to each.