January provided a promising start to the year with three of the four (equity, interest rate, currency, commodity) trading sectors presenting very strong opportunities for our models. Interest rates were the sole sector in the red, but the bearish trend establishing itself in bonds presents a promising environment going forward and, in concert with that trend, our positioning is in transition.
Encouraging corporate earnings coupled with positive news on tax reform resulted in equity bulls starting the year at full gallop. The Dow posted its sixth best January in the past 68 years and our portfolio was favorably positioned to capture the move. Even so, in choosing to maintain an equal risk budget across the four sectors, we were also able to capitalize on US dollar weakness and rising energy prices.
Trading in commodities returned +0.47%(gross). Bullish positioning in the energy subsector led the way as the energy price rally, which had begun in December, continued into the New Year. The overall TNR continued its upward trend reaching a higher level than what was seen in December.
Currency trading was up +2.33% (gross). This sector recovered from poor performance in December in a major way. Our net short US dollar positioning set us up well to capture January’s precipitous drop in US dollar (USD). The ICE Dollar Index price chart highlights this downward trend which, in turn, resulted in an overall pick up in TNR from mid-December lows.
Equity trading returned a robust +3.95% (gross). Equities continued to outperform all other sectors in the portfolio and we remained long equities throughout the month. The E-Mini S&P 500 Index Future chart illustrates January’s very tradeable conditions with this bullish price move. The overall TNR remained above the levels seen in December 2017 although it did fall from its intra-month peak in the last week.
Interest rate trading was down -0.84% (gross) this month. We are net short the interest rate sector across short, medium and long-term rates. This sector is in a significant transition after being long for most of 2017, and so is our positioning. The CBOT 10-Year Note price chart below highlights the potentially “trend-friendly” moves which could evolve this year despite the bearish environment.