A lot is made of relative returns and how one strategy or fund does against the SP500.  While not the best benchmark for something like Global Macro it is nonetheless the benchmark that everyone is most familiar with and that is used the most on CNBC and in magazines.  So how does global macro stack up to the SP500?

The chart below shows how $1000 invested in the SP500 and the Barclays Global Macro Index would have done for YTD for 2009.  As you can see the SP500 while getting off to a rocky start is now leading the macro index by 9.68% so far.  While the performance of the SP500 has been impressive the other side of the story is that to get the 18.04% return in the SP500 you first had to go through a -19.56% drawdown in January and February to get it.  Contrast that to the Global Macro Index where you had a -2.06% drawdown and a 6.63% return YTD.  Yeah you are outperforming with the SP500 but the volatility has been huge. (click on chart to enlarge)

Barclays Global Macro Index vs SP500 2009 YTD

Of course nine months is not usually the best representation of a strategy.  Going from 1997 to the end of September 2009, how has the SP500 done in absolute and relative terms?  Since 1997 the SP500 has given a total return of 42.70% and a CAGR of 3.07%.  The Global Macro Index on the other hand has delivered a total return of 237.91% in the same time and a CAGR of 10.92%.  Looking at the chart below you can see that while the SP500 has periods of serious out performance, over time it has lagged in a big way. (click on chart to enlarge)

Barclays Global Macro Index vs SP500 1997-September 2009

Not only has the SP500 lagged in total return but when looking at the risk taken to achieve the anemic 42.7% you really have to step back and rethink a long only equity approach.  In fact if you have been in a SP500 index fund since 1997 we excuse you to go bang your head against the wall for a few minutes.  Once you are back look at the chart below of the drawdowns that you had to endure to get that awesome 42.7% total return.  Yes, you see two drawdowns over -45% each.  In 2002 we were down -46.28% and in early 2009 we were down -52.56%.  All this for a return that was not much better then sitting in T-Bills. (click on chart to enlarge)

SP500 Drawdown 1997-September 2009

Looking at the same chart for the Global Macro Index below we can see that the drawdowns are far lower and shorter in duration.  In fact the worst drawdown that we have seen so far is -6.42% in October 2008 and right now we are at new equity highs while the SP500 is still -31.78% below its highs.(click on chart to enlarge)

Barclays Global Macro Index Drawdown 1997-September 2009

Does this mean that everyone should go out and invest all their money in global macro and buy our weekly global macro newsletter?  No, on the first and yes on the latter.   All kidding aside what this does show is the fallacy of long only equity investing.  While being 100% invested in equities is great when they are moving higher you get absolutely crushed when things come crashing down.  In global macro you are not beholden to the possibility of equity risk premia but instead are able to look for the best risk to reward opportunities out there in any asset class.  This includes stocks, bonds, commodities, currencies, and more.  This flexibility to go where the best opportunities are enables the global macro investor to outperform not in any given year but in a full market cycle.

Happy Trading,

Dave@TheMacroTrader.com

Disclaimer-We are a global macro research company and are therefore a bit biased in our investment views.

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This week we had a slight rise in the risk index.  This was once again due to the fact that Treasury bonds have been so volatile lately which has caused a few of our models to have a bit of a whipsaw.

While the readings have changed a bit, rising from 22.22% to 33.33%, the levels are still fairly bearish.  Remember that the risk index goes from 0-100% with 100% being the most bullish and 0% the most bearish so a reading of 33.33% is still pretty bad.

We could be at a short term bottom or maybe we have already hit “the bottom” but until the market internals improve considerably we won’t be putting on any large trades to the long side.  In fact right now we are focusing a lot more on the short side.

Happy Trading,

The Macro Trader
Dave@TheMacroTrader.com

P.S.If you are interested in learning more about Macro Trading sign up for our FREE Macro Trading 101 course in the box below.

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This week we added a new indicator to our Equity and Fixed Income Risk Indexes. Because of this the percent value has changed but the chart looks the same. For stocks we actually dropped from being 31.25% bullish to 27.78% bullish.

The new timing indicator that we added to the model is based on the relative strength between stocks and bonds. In future issues of The Macro Trader newsletter we will be sharing our research findings with our subscribers.

macrotrader.com/wp-content/uploads/2008/12/stock-risk-index.jpg” title=”stock market risk index”>

Some of the bullish factors are that valuations are decent, breadth has been improving, sentiment is fairly bullish, and rates are low. On the bear side we have horrid economic data, declining earnings, and the biggest one is that the long term trend is still down. As the market tries to figure out what it is doing we are managing our risk with position sizing and stops.

Happy Trading,
The Macro Trader

P.S. If you would like to learn more about our risk indexes for US equities, fixed income, and precious metals as well as have access to our research on US Equities, Fixed Income, Precious Metals, Foreign Equities, and Currencies then request a free trial to The Macro Trader. Simply e-mail us at Editor@TheMacroTrader.com and put trial in the subject line.

If you would like to receive our new FREE course “Macro Trading 101″ put your e-mail in the box below.

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This week we had the first uptick in the equity risk index in a month. The primary reason that it moved up was due to some sentiment indicators such as the Investors Intelligence Bull Bear Ratio hitting levels that historically have provided good buying opportunities.

Of course if you look at the chart you can tell that it is still very low. A low level in the risk index signifies a market that is very unattractive, whereas a very high level is bullish. Right now there is a ton of bad data out there and only a few things that are bullish. While we have not ruled it out we do not feel like this is the second coming. Eventually US Equities will start to look attractive again and we will allocate accordingly. We gauge risk first and then look at return.

Happy Trading,
The Macro Trader

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Our US equity risk index has been at the same level for three weeks now.  Not too much has changed.  We have a few valuation and sentiment indicators that are bullish and everything else is bearish which does not bode well for the market.  As we have stated in our newsletter we are short term positive and long term bearish.

Again the higher the index level the more bullish we get and conversely the lower the level gets the more bearish we get.

macrotrader.com/wp-content/uploads/2008/11/stockriskindex.jpg” title=”Stock market risk index”>

We hope that you find the weekly equity risk index useful.  In our newsletter we also provide risk indexes for fixed income and precious metals.  These are but a few of our proprietary models that we use to help guide us in our trading.

Happy Trading,

The Macro Trader

P.S. We are currently running a 1-Month free trial offer.  Simply e-mail editor@themacrotrader.com with trial in the subject line.

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Our stock market risk index did not change this week and remains at 25%. In simple terms the lower the reading the more bearish we are and the higher the reading the more bullish we are. As you can see in the chart we have been fairly bearish for most of the year.

Most of the economic indicators we follow are very bearish, the trend is down, breadth is poor, and money flows are negative.  On the bullish side sentiment is at extreme lows and valuations continue to improve.  We expect a rally here in the next few days but long term are still fairly bearish.

Happy Trading,

The Macro Trader

P.S. If you want to ensure that you receive every update make sure and subscribe by RSS or E-mail by clicking on the RSS button on the right hand side of the page.

P.S.S. This is usually posted by Monday of each week but due to travel delays it was late this week.

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Our stock market risk index did not change this week and remains at 25%. In simple terms the lower the reading the more bearish we are and the higher the reading the more bullish we are. As you can see in the chart we have been fairly bearish for most of the year.

If you have read our previous posts you know our active beta approach to managing some of the model portfolio.  The risk index is one of the primary inputs as to how much to invest.  Our complete model is a bit different but essentially you would invest X% of your account depending upon how bullish or bearish the model is.  Using this risk index you would only have 25% of your money at risk right now.  Since it dynamically changes depending upon what it expects out of the market it is not only a useful timing gauge but also helps measure the proper position size and asset allocation.

Hopefully this short explanation helps some of the answers that we have received lately regarding the risk index.  If you have more questions feel free to e-mail us.

Happy Trading,

The Macro Trader

P.S. If you want to ensure that you receive every update make sure and subscribe by RSS or E-mail by clicking on the RSS button on the right hand side of the page.

P.S.S. This is usually posted by Monday of each week but due to travel delays it was late this week.

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Our Equity Risk Meter essentially measures how bullish or bearish we are towards the US Markets.   The higher the reading the less risk there is in the market and the lower it goes the more risk there is.

Right now for instance the meter is reading 12.5%, which is very bearish.  As you can see we have been bearish for some time now and very bearish since mid June, enabling us to avoid almost all of the downturn in the stock market.  When the meter starts to climb we become more and more bullish and look towards the longside.  For now we are essentially on the sidelines sitting in cash.

We will be posting our risk meter for US equities each week.  If you would like to follow it you can either come to the site each week or simply subscribe to our RSS feed.  Using RSS you will be able to either receive our posts as an e-mail or in your RSS reader.

Happy Trading,

The Macro Trader

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Hello,

While we have obviously not posted on the blog in a while we do write the newsletter every week and performance while not great has at least been positive.  We are up about 2% for the year and the SP500 is down around 30% as of this writing.

We are always working on different models, indicators, and of course trading ideas.  Recently we have been doing a lot of work on building a risk index and while it is far from perfect we think that it will add value to our process.  Starting next Monday we will be posting it every day for a week or two and then only sending it to RSS subscribers.

Our risk index currently looks at the different volatility indexes for US Equities, Foreign Equities,  Oil, Gold, G-7 currencies, and Emerging Market Currencies.  The model also looks at different credit indicators such as the TED Spread, other Fixed Income Spreads, and the slope of the Yield Curve.  Finally we include some information on where money is flowing into and out of.

We think most investors regardless of timeframe will find the daily report useful and again invite all of you to subscribe to our RSS feed.  You can select to see it in the RSS reader of your choice or in your e-mail.  Simply click on ‘RSS Posts’ over on the right and follow the simple instructions.

Happy Trading,

The Macro Trader

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