Weekly Commentary – Will the Carry Trade Ride Again?

A PDF version of this commentary can be downloaded here.

Special Announcement

Newfound Research has announced the launch of the Newfound Risk Managed U.S. Sectors strategy.

To learn about how you can access the strategy, you can contact us at or 617-531-9773.

Market Recap

An interesting map has been floating around the last week or so.  Constructed at The Telegraph, it shows the massive disparity between global interest rates.


Weekly Commentary – Value Stocks on Deck

A PDF version of this commentary can be downloaded here.

Market Recap

Without a doubt, most recaps this week will be about the Greek debt deal, where Greece received a 4-month financial aid extension and in-turn agreed to honor all its debts. Markets seemed to take the news positively with the iShares European Monetary Union ETF (EZU) up 1.88% on the week and 1.58% on Friday alone. But we’ll leave it to the economists to speculate as to whether the game “kick the can down the road” is ultimately positive or negative for European growth in the long-run.

So with everyone’s eye off of the U.S., we thought that’s where we’d spend a bit of time this week. In particular, we want to focus on the relationship between value and glamour stocks. Our models are indicating that glamour momentum is beginning to reach extreme levels, a sign that markets may soon swing in favor of value. The last extreme glamour momentum reading we saw was on 2/7/2014. By the time our indicators peaked in favor of value extremism on 4/10/2014, large-cap value (IWD) outperformed large-cap growth (IWF) by 348 basis points. While we don’t usually try to capture such short-term market trends, they are powerful currents to be aware of.


Questioning Your Most Dangerous Assumptions: Does Rebalancing Add Value?

In a prior post, I waxed philosophical about the importance of remaining skeptical of the assumptions that underlie portfolio construction.

Another commonly accepted assumption is that rebalancing is a value-add activity.  The underlying theory here is that assets tend to mean-revert over time, so by rebalancing on an annual basis, we can tilt our portfolio away from those expensive assets that have grown in relative portfolio weight and towards those cheap assets that have shrunk in relative portfolio weight.  Rebalancing institutionally annualizes the practice of "buy high, sell low."

But does it actually work?  Here's the test: we're going to use inflation-adjusted returns for the S&P 500 and a constant-maturity 10-year U.S. Treasury bond index.  We're going to construct a 50/50 portfolio and run it forward for 25 years (more or less the investment horizon for most investors).  For one portfolio, we're going to rebalance annually.  For another, we're just to just set it and forget it, letting the portfolio drift over time.  At the end of 25 years, we'll compare the total-return profile of both indices to see if rebalancing truly added value.


Weekly Commentary – Are Valuation and Momentum at Odds?

A PDF version of this commentary can be downloaded here.

Market Recap

The S&P 500 broke free of its recent mean-reversionary tendencies and charged upward to a new all-time high of 2096.99. Queue the balloons and tickertape: it’s time to party like it’s 1999!

Now some may remember how partying in 1999 turned out (hint: not well). While the deepest troughs of sorrow have typically follow peaks of exuberance – like stocks in 1929 and 1999 or the housing market in 2007 – it turns out that they tend to be the exception, and not the rule. Based on historical data from 1900, the probability that a market high is followed by a 3-year positive return has been 71% – with an average return of 22%.