Day Hagan/Ned Davis Research Smart Sector® Fixed Income Strategy Update April 2024
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Day Hagan/Ned Davis Research Smart Sector® Fixed Income Strategy Update April 2024 (pdf)
Risk Management Update
The risk management model (Figure 1) seeks to reduce exposure to fixed-income sectors most sensitive to equity drawdowns. The risk management model improved during the month and entered April, recommending full model exposure to areas most sensitive to equity markets: U.S. High Yield, Emerging Markets, U.S. Investment Grade, and Floating Rate Notes.
Figure 1: Smart Sector® Fixed Income Risk Management Model
The bullish reading from the model is driven by strong internals. Five of the seven price-based measures—including relative strength, trend, and breadth—remain bullish. External measures such as option-adjusted spreads, global trade, and high-yield and emerging market breadth remained bullish. Short-term sentiment—as measured by the NDR Daily Trading Sentiment Composite—moved back to neutral during the month (Figure 2). For now, the weight of the evidence recommends a fully invested allocation to fixed-income sectors according to the model.
Figure 2: Excessive Short-Term Optimism Has Been Relieved: Neutral for Stock Exposure
Fixed Income Market Update
After a weak February, the Bloomberg Barclays U.S. Aggregate Bond Total Return Index rebounded in March, gaining just under 1%. Breadth improved sharply—all nine fixed-income sectors we track posted positive returns for the month.
Sticky inflation, strong economic growth, and the repricing of when and how many times the Fed is going to cut rates soured investors on bonds. In Q1 2024, stocks beat bonds by 11.3% on a total return basis, the most in Q1 since 2012 (Figure 3). History’s message for the rest of 2024 is positive for stocks on an absolute basis and relative to bonds, albeit at a slower rate than Q1’s torrid pace.
Entering April, the fixed income allocation strategy continued to favor risk-on leadership but did not rebalance. The model remains overweight (versus the AGG benchmark), U.S. Treasuries (allocated across short-, intermediate-, and long-duration), High Yield, and Emerging Market Bonds. The portfolio is marketweight TIPS and Mortgage-Backed Securities and underweight U.S. Floating Rate Notes, U.S. Investment Grade, International Investment Grade, and International Bonds.
Figure 3: Comparative Returns for Treasury Bonds, Corporate Bonds, Stocks, and Cash
U.S. High-Yield bonds’ allocation remained overweight. All six indicators are bullish for the sector. During the month, market volatility (as measured by the VIX) moved bullish for high-yield bonds (Figure 4).
Figure 4: Lower Stock Market Volatility is Bullish for U.S. High Yield Bonds
The allocation of U.S. Investment-Grade Corporate bonds remained underweight. Indicators are now mixed. On a fundamental basis, bond volatility is bullish but offset by bearish option-adjusted spreads and credit default swaps. Furthermore, a strengthening U.S. dollar moved neutral for the sector during the month (Figure 5). Technicals are also mixed—a bullish mean reversion indicator is offset by a bearish short-term trend measure.
Figure 5: Strengtheing U.S. Dollar is Neutral for U.S. Investment Grade Corporate
The U.S. Treasury Inflation-Protected Securities’ (TIPS) allocation remained the largest underweight. Commodity price trends and high-yield option-adjusted spreads remain headwinds for TIPS. These bearish measures are confirmed by TIPS’ weak technicals, including the relative strength index, the slope of its relative strength, and the short-term trend (Figure 6).
Figure 6: Weakening Short-Term Trend is Bearish for U.S. TIPS
International Investment-Grade bonds’ allocation remained underweight. Stock market volatility joined inflation expectations as bearish indicators for the sector. Price-based measures are now mixed—rising relative strength is offset by a short-term trend that weakened during the month—the index’s relative strength is sitting just below its 63-day moving average (Figure 7).
Figure 7: Weak Short-Term Trend is Bearish for U.S. TIPS
Summary
Entering April, the fixed income allocation strategy continued to favor risk-on leadership but did not rebalance. The model remains overweight (versus the AGG benchmark), U.S. Treasuries (allocated across short-, intermediate-, and long-duration), High Yield, and Emerging Market Bonds. The portfolio is marketweight TIPS and Mortgage-Backed Securities and underweight U.S. Floating Rate Notes, U.S. Investment Grade, International Investment Grade, and International Bonds.
This strategy utilizes measures of price, valuation, economic trends, monetary liquidity, and market sentiment to make objective, unemotional, rational decisions about how much capital to place at risk, as well as where to place that capital.
For more information, please contact:
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Day Hagan/Ned Davis Research
Smart Sector® Fixed Income ETF
Symbol: SSFI
Strategy Description
The Smart Sector® Fixed Income strategy combines two Ned Davis Research quantitative investment strategies: The NDR Fixed Income Allocation and the NDR Catastrophic Stop.
The Process Is Based On The Weight Of The Evidence
The fund begins by overweighting and underweighting fixed-income sectors based on Ned Davis Research’s proprietary fixed-income models.
Each of the models utilizes sector-specific, weight-of-the-evidence composites of fundamental, economic, technical, and behavioral indicators to determine each area's probability of outperforming the other categories.
Sectors are weighted accordingly relative to an equal-weighted benchmark.
When Market Risks Become Extraordinarily High - Reduce Your Portfolio Risk
The model remains fully invested unless the Ned Davis Research Catastrophic Sell Stop (CSS) model is triggered, whereupon the areas which underperform during periods of market stress (high yield, Emerging Markets, U.S. Investment Grade, and Floating Rate Notes) may be trimmed by up to 50%.
The NDR Catastrophic Sell Stop model combines time-tested, objective indicators designed to identify periods of high risk for the broad financial markets. The model uses price-based, breadth, deviation from trend, fundamental, economic, interest rate, behavioral and volatility-based indicator composites.
When Market Risks Return To Normal — Put Your Money Back To Work
When the NDR CSS model moves back to bullish levels, indicating lower risk, the strategy will reverse toward being fully invested.
Ned Davis Research Disclaimers
The data and analysis contained within are provided "as is" and without warranty of any kind, either express or implied. The information is based on data believed to be reliable, but it is not guaranteed. NDR DISCLAIMS ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY, SUITABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE. All performance measures do not reflect tax consequences, execution, commissions, and other trading costs, and as such investors should consult their tax advisors before making investment decisions, as well as realize that the past performance and results of the model are not a guarantee of future results. The Smart Sector® Strategy is not intended to be the primary basis for investment decisions and the usage of the model does not address the suitability of any particular in Fixed Income vestment for any particular investor.
Using any graph, chart, formula, model, or other device to assist in deciding which securities to trade or when to trade them presents many difficulties and their effectiveness has significant limitations, including that prior patterns may not repeat themselves continuously or on any particular occasion. In addition, market participants using such devices can impact the market in a way that changes the effectiveness of such devices. NDR believes no individual graph, chart, formula, model, or other device should be used as the sole basis for any investment decision and suggests that all market participants consider differing viewpoints and use a weight of the evidence approach that fits their investment needs.
Disclosures
Past performance does not guarantee future results. No current or prospective client should assume future performance of any specific investment or strategy will be profitable or equal to past performance levels. All investment strategies have the potential for profit or loss. Changes in investment strategies, contributions or withdrawals and economic conditions may materially alter the performance of your portfolio. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment or strategy will be suitable or profitable for a client’s portfolio. Historical performance results for investment indexes and/or categories generally do not reflect the deduction of transaction and/or custodial charges or the deduction of an investment management fee, the incurrence of which would have the effect of decreasing historical performance results. There can be no assurances that a portfolio will match or outperform any particular benchmark.
Day Hagan Asset Management is registered as an investment adviser with the United States Securities and Exchange Commission. SEC registration does not constitute an endorsement of the firm by the Commission nor does it indicate that the adviser has attained a particular level of skill or ability. Day Hagan Asset Management claims compliance with the Global Investment Performance Standards (GIPS®). GIPS is a registered trademark of CFA Institute. CFA Institute does not endorse or promote this organization, nor does it warrant the accuracy or quality of the content contained herein. Day Hagan Asset Management has been independently verified for the periods June 30, 2008 through December 31, 2020. The U.S. dollar is the currency used to express performance. Calculation Methodology: Pure gross of fees returns are calculated gross of management and custodial fees. Net of fees returns are calculated by reducing the gross number by an average investment management fee of .85% and gross of custodian (trust) fees. Net of fees returns for wrap accounts are calculated net of management fees, transaction costs and all administrative fees charged directly to the client by the broker-dealer. To receive a GIPS composite report, contact Linda Brown at (941) 330-1702 or email at linda.brown@dayhagan.com.
References to “NDR” throughout refer to Ned Davis Research, Inc. Clients engaging in this strategy will be advised by Day Hagan and will not have a contractual relationship with NDR. Day Hagan purchases signals from NDR, and Day Hagan is responsible for executing transactions on behalf of its clients and has discretion in how to implement the strategy.
NDR is a registered as an investment adviser with the Securities and Exchange Commission (SEC). NDR serves as the Signal Provider in connection with this strategy. The information provided here has not been approved or verified by the SEC or by any state or other authority. Additional information about NDR also is available on the SEC's website at https://www.adviserinfo.sec.gov/. This material is provided for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security or other financial instrument or to participate in any trading strategy. NDR’s strategies, including the model discussed in this publication, are intended to be used only by sophisticated investment professionals.
There may be a potential tax implication with a rebalancing strategy. Re-balancing involves selling some positions and buying others, and this activity results in realized gains and losses for the positions that are sold. The performance calculations do not reflect the impact that paying taxes would have, and for taxable accounts, any taxable gains would reduce the performance on an after-tax basis. This reduction could be material to the overall performance of an actual trading account. NDR does not provide legal, tax or accounting advice. Please consult your tax advisor in connection with this material, before implementing such a strategy, and prior to any withdrawals that you make from your portfolio.
There is no guarantee that any investment strategy will achieve its objectives, generate dividends or avoid losses.
© 2023 Ned Davis Research, Inc. | © 2023 Day Hagan Asset Management, LLC
© Copyright Ned Davis Research, Inc. All Rights Reserved | These materials are historical and intended to be used only as examples, and do not necessarily reflect current views or advice of NDR or its representatives.
