Razor’s Edge

One thing we have learned through trading markets over the last 40 years is that price moves almost always go farther and last longer than one would expect. Let’s examine how Pave can help you use that to your advantage.

Seasonals tend to favor a rally into year-end, and especially after an election, there can be a strong uptrend. The problem is that global trade frictions and tariffs can turn market sentiment negative at any time. Sentiment will also sour if, as we outlined in our Q4 outlook, the U.S. unemployment rate rises further or if Beijing is unable to revive credit demand.

Given the high levels of stock valuation, investor sentiment, and portfolio long positions, it is tempting to position defensively by setting Pave Pro’s Performance Priority to “Tracking Error Focus.” However, because our models still have high rankings for earnings and price momentum factors, you can think about riding the wave of optimism by moving from our default “Balanced” Performance Priority to “Strong Outperformance Focus.”

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Once the market begins exhibiting excessive speculative behavior (i.e., excessively low put/call ratios and sentiment readings) and our models start to see defensive factors move up in our rankings, then it would be prudent to move quickly to set Performance Priority to “Balanced” or “Tracking Error Focus” and set Volatility Preference to “Min Vol.” 

However, while Pave Pro’s factor tilts allow advisors to hone recommendations to evolving market conditions, the beauty of our technology is that these adjustments will happen regardless. If left uninterrupted, Pave Pro responds automatically to changing market circumstances, allowing advisors to decide where their time is best spent.  

We will be on the lookout for signs of both speculative blow-off as well as reversal in equity markets and will be alerting you about them in future notes.

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