Deja Vu All Over Again

Theta Announces Another New Strategy

Existing Manager, John McClure, founder of ProfitScore Capital Management, Inc. has announced the addition of another strategy. The Tactical US Equities model uses multiple quantitative models to trade US Mid- and Large-Cap stocks on a long/short/cash basis. Theta began tracking this new strategy as of its inception date of July 1, 2017.

Déjà Vu All Over Again

The Dow Jones Industrial Average recently crossed 22,000 for the first time ever. This blue-chip index has now more than tripled since a low set in March 2009. The Wall Street Journal recently produced an article explaining five different theories as to why the stock market continues to defy gravity (see below).

As I read the article, I was reminded of the late 1990s when the stock market was on a similar tear. Then, as now, all sorts of theories were given as to why the market could continue producing double digit returns without fear of a correction or bear market. Of course, we all remember how that turned out.

I have reprinted the Wall Street Journal article in its entirety below. If you were around in the late 1990s, you’ll likely remember some of these theories. If you’re new to the markets, they can serve as a warning. After the quoted article, I’ll add a few comments of my own:



Wall Street Jourrnal

By: Akane Otani and Chris Dieterich

(#1) - The biggest U.S. corporations are on stronger footing. With most S&P 500 companies having reported second-quarter results, firms are on track to post another quarter of strong profit growth—building on gains from the end of last year, when companies snapped a five-quarter streak of earnings contraction, according to FactSet. The rebound has been broad, reflected not just among oil firms—which have recovered along with oil prices—but also in tech giants like Apple Inc. and economic bellwethers like Caterpillar Inc. Those who believe the stock market’s trajectory is ultimately determined by the rate of earnings growth say continued strength among U.S. firms should help fuel further gains in the stock market.

(#2) - Economists are projecting a pickup in global growth, while the U.S. expansion remains slow and steady—a combination that investors say has helped boost multinational companies, which have been among the best-performing stocks this year. Boeing Co., Apple and McDonald’s Corp. made up the bulk of the gains that pushed the Dow industrials past 22000 for the first time. Profits at such firms may get an additional boost if weakness in the U.S. dollar persists, because it makes their exports cheaper to foreign buyers. The WSJ Dollar Index, which measures the currency against a basket of 16 others, has fallen 7.5% this year through Wednesday.

(#3) - Investors are currently contending with a rare but favorable environment: an economy that is expanding but not fast enough that the Federal Reserve is in a rush to raise interest rates. The unemployment rate fell to a 16-year low in May, yet inflation has remained stubbornly below the Fed’s 2% target—suggesting to many investors that the central bank is unlikely to raise rates aggressively. Many analysts caution the so-called Goldilocks scenario is unlikely to last. But for now, “in a period where accommodation remains very aggressive, all of this is coming together to keep the markets afloat at these higher levels,” said Tracie McMillion, head of global asset allocation strategy for Wells Fargo Investment Institute.

(#4) - Proliferation of Index Funds: One hallmark of this year’s stock-market rally is the relentless flow of money into index-tracking mutual and exchange-traded funds. Some $128.6 billion has moved into U.S. index-tracking funds that own U.S. stocks in 2017 through June, while a net $99 billion was withdrawn from actively managed U.S. stock funds, according to Morningstar Inc. Buying of passive funds is partially offset by the money flowing out of active ones, but some investors warn that the rising popularity of index funds that own hundreds, sometimes thousands of stocks, translates into indiscriminate buying divorced from corporate fundamentals. One concern is that persistent index buying elevates valuations across the board and that, should market turmoil erupt, investor index buying would turn to selling, leaving the broader market acutely vulnerable.

(#5) - Nowhere Else to Go: In a low-rate environment, one reason investors say the stock market keeps rising is simply that there is no alternative for returns. After an initial selloff following Election Day, U.S. Treasurys are back roughly where they began the year, with the yield on the 10-year note at 2.264% Wednesday, compared with 2.446% at the end of 2016. Many bond investors believe yields are likely to stay relatively low unless there are signs that inflation is picking up or Congress is able to push through potentially growth-boosting policies like fiscal stimulus. For now, with bonds offering paltry yields, many investors begrudgingly say stocks remain their asset class of choice—even if they are getting increasingly nervous about the long stock rally.


While each of the above theories deserves further attention and comment, space does not permit. Instead, I want to concentrate my comments on just two of the theories in an effort to provide an expanded historical perspective.

Specifically, Theory #4 above discusses how stock purchases by passive index funds are creating an indiscriminate demand for stocks “…divorced from corporate fundamentals.” In other words, when investors buy index funds and ETFs just for the sake of having a passive equity exposure in their portfolios, the underlying stocks may respond to that demand by acting more like commodities.

Many investors do not realize that the purchase of passive index mutual funds and ETFs results in the underlying stocks being purchased without regard as to their merit. Also, given that many indexes are capital-weighted, relatively few stocks can drive the index, while also increasing the risks.

When we couple index investing with Theory #5 that low fixed income returns have resulted in investors having no choice but to buy stocks, we get a situation where the demand for stocks increases and takes prices right along with it. If that situation exists, then we may be able to explain stock market movements in terms of commodities, where the forces of supply and demand dictate prices.

The term being tossed around now as it was back in the 1990s is “commoditization” of equities. You can do an Internet search and find many theories both for and against this phenomenon, but the general idea is that demand for stocks may be affecting prices more than the underlying fundamentals.

Theta Research’s owner, Gary D. Halbert, cut his teeth in the industry as a successful commodities hedging specialist. One of his most-used quotes is that when commodities prices melt up too high, they eventually tend to “fall off a cliff” on the way back down. Think what that says about stocks that now seem to be reacting more to the laws of supply and demand than financial fundamentals.

So will stock prices fall off a cliff at the end of the current bull market rally? If you look at what happened during the late 1990s and 2002 to 2007 booms, the answer is probably yes. The only question is when. That being the case, doesn’t it make sense for investors and their advisors to include strategies with the ability to react to market forces rather than being a passive victim of them?

Or, even better, what about strategies that employ techniques often used in the managed futures industry that attempt to take advantage of market volatility? Theta Research offers a database of actual performance posted by investment managers whose strategies include rules-based trading systems that are often found in managed futures accounts. Strategies such as hedging, long/short, traditional market timing, momentum, sector rotation, etc., etc. can be found among Theta’s featured Investment Managers, giving investors an alternative approach to a market that defies conventional wisdom.

Early in my career, I worked for a life insurance company. One of the favorite catch phrases used in that industry is that people don’t plan to fail, they fail to plan. The same could be said today regarding the many passive investors who are sitting ducks for the next bear market or major correction. Doesn’t it make sense to diversify into investments that have the potential to manage the risks of a commoditized equity market rather than being victimized by it?

We think so.

If you agree, and want to learn more about the Theta database, contact me at Theta Research by phone at (512) 628-5201, Option #1 or via e-mail at .(JavaScript must be enabled to view this email address). You can also learn more about our active strategies on our website at

Stay active,


Posted by MPosey on 08/22 at 03:00 PM in Company News • (0) CommentsPermalink