Here’s a look at trends in November:

Lower quality bonds dramatically under-performed investment grade bonds last month.<1>

1. Why? Junk bond spreads troughed on November 4th. The strong labor report suggested the Fed would definitely tighten in December, which surprisingly hurt junk bonds more than Treasuries.
   Capitalization-weighted indices modestly beat equal-weighted indices with the same objective once again.<2>

2. Why? The trend towards large companies continues.
   Asia and Europe were highly correlated once again.  This time, each declined just under -2%.<3>

3. Why? Europe performed better in local currency, but lost that advantage translated to dollars. HEDJ had a very nice (+3.5%) month.
   Frontier markets slightly outperformed emerging markets, but both declined over 3%.<4>

4. Why? World instability and lower commodity prices do not tend to favor developing markets.
   Hedged foreign funds decidedly beat un-hedged foreign funds<5>

5. Why? The dollar was very strong on the belief that the Fed would raise rates on Dec. 16th and Draghi would extend QE on Dec. 4.
   Small cap companies edged out mid-size companies in performance.<6>  The difference widened from 30 bp in October to over 120 bp in November.  I don’t have a good idea as to why.

   Growth underperformed value by about 40 bp in November, but leads it by 860 bp year-to-date.<7>  I would suggest, therefore, that one not read too much into November’s result.

   High quality companies slightly trailed lower quality companies, but the former still enjoys a 3.8% advantage year to date.<8>  Outperformance of lower quality companies tend to indicate that the bull market is healthy, because higher beta is being rewarded.

   Notes on Asset Allocation

   November was depressingly similar to May and a good deal of 2014 in that U.S. stocks<9> grinded out a small gain, but a diversified portfolio that included bonds and foreign stocks lost ground, because the decline in the latter two asset classes more than offset the fractional U.S. stock gain.  Financial stocks have done relatively well because the market believes rising interest rates will help banks earn more.  Technology has been the second best sector because tech stocks are thought to be interest rate insensitive.  Utilities and consumer staples have performed the worst because they have stable but slow growing businesses and as such are the most likely to use leverage to improve returns.  Wherever there is leverage, higher interest rates are a problem.

   So how do we interpret this?

   I have almost nothing to add to what I said last month about a long-in-the-tooth bull market.  Technically, the trend is up but investors have shown no enthusiasm for challenging the May 21 all- time highs.  Probably the most intriguing play is hedged European equities on the idea that Draghi’s moves are going to continue to lift those markets in local currency terms.

   <1> Source: US High Yield BB Option Adjusted Spread as per YCharts.com

   <2> Source: SnP 500 Equal Weight vs. S&P 500 Capitalization weighted as per Morningstar

   <3> Source: MSCI Asia v MSCI Europe as per Morningstar

   <4> Source: MSCI Frontier Emerging Markets versus MSCI Emerging Market as per Morningstar

   <5> Source: MSCI World ex US USD vs MSCI World ex US Local Currency as per Morningstar

   <6> Source: S&P 400 vs. S&P 600 as per Morningstar

   <7> Source: S&P Growth v S&P Value as per Morningstar

   <8> Source:  S&P 500 High Quality versus S&P 500 Low Quality as per Morningstar

   <9> S&P 500

Past performance is no assurance of future results. Trademark Financial Management, LLC (“Trademark”) is a registered investment adviser with its principal place of business in the State of Minnesota. Trademark and its representatives are in compliance with registration requirements imposed upon investment advisers by those states in which Trademark operates. Trademark may only transact business in those states in which it is registered or qualifies for an exemption or exclusion from registration. This newsletter is limited to the dissemination of general information pertaining to its investment advisory/management services. Any subsequent, direct communication by Trademark with a prospective client shall be conducted by a representative that is either registered or qualifies for an exemption or exclusion from registration in the state where the prospective client resides. A complete list of all recommendations will be provided if requested for the preceding period of not less than one year.   It should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities in this list.  Opinions expressed are those of Trademark Financial Management and are subject to change, not guaranteed and should not be considered recommendations to buy or sell any security. For information pertaining to the registration status of Trademark please contact Trademark at (952) 358-3395 or refer to the Investment Adviser Public Disclosure web site (www.adviserinfo.sec.gov). For additional information about Trademark, including fees and services, send for our disclosure statement as set forth on Form ADV from us using the contact information herein or by calling 952-358-3395. Please read the disclosure statement carefully before you invest or send money. Any reference to a chart, graph, formula, or software as a source of analysis used by Trademark Financial Management staff is one of many factors used to make investment decisions for your portfolio.  No one graph, chart, formula, or software can in and of itself be used to determine which securities to buy or sell, when to buy or sell them, or assist any person in making decisions as to which securities to buy or sell or when to buy or sell them.  Any chart, graph, formula, or software used is limited by the data entered and the created parameters. The data was obtained from third parties deemed by the adviser to be reliable. Nonetheless, the adviser has not verified the results and cannot be assured of their accuracy. 

Here’s a look at trends in October:

High quality companies performed much better than lower quality companies.

1. Why? Lower qualities companies had a sharp rally in late September after the Fed held rates unchanged, but quality re-asserted itself firmly by the third week of October.
   Lower quality bonds outperformed investment grade bonds this month.

2. Why? Junk bond spreads peaked on October 2nd and contracted steadily throughout the month.
   Capitalization-weighted indices beat equal-weighted indices with the same objective once again.

3. Why? The trend towards large companies continues as larger companies typically have stronger balance sheets, allowing them to more effectively use leverage.
   Asia outperformed Europe again, but both indices gained over 8%

4. Why? More re-assuring news from China, more stimulus from the European Central Bank.
   Frontier markets lagged emerging markets for the first time in several months.

5. Why? Both gained, but neither rose nearly as much as developed markets.
   Hedged foreign funds beat un-hedged foreign funds

6. Why? The currency markets were volatile in October with the dollar losing ground after the weak U.S. employment report, then gaining strength on Draghi’s extension of QE in Europe and the Fed’s hawkish comments last week.
   Small cap companies edged out mid-size companies in performance, but the difference was small.

   As one might expect from a market up almost 9%, “risk on” industries materials, energy, and technology foremost crushed risk off industries.

   Growth modestly outperformed value for the first time in three months. It appears as though the growth trend remains in place.

   The trend continues.

   The stock market failed to make new lows in September, signaling a possible bullish trend change.  That change appears to have been confirmed in October as S&P 500 came very close to its all-time highs on Wednesday the 28th. (See Chart 1) The NASDAQ came even closer.  (As of today, 11/2 the indices are again testing their all-time highs.)  Price and breadth action argues for the market to go higher in the short term.

   Chart 1

Source: Stockcharts.com

How do we interpret this?

If stocks would have gone on in September or October to fall below their August lows, it would have been a strong signal to us that the primary trend was bearish and that a more defensive posture was prudent.  Obviously, that didn’t happen.  We have experienced a nice recovery in October to the point that we are 2-3% from all-time highs.  That puts us back where we were in July: a long-in-the-tooth bull market with fairly expensive valuations, interest rates that are likely to begin moving higher in the next couple of months and corporate profit margins showing signs of coming down from record levels.   Many investment professionals wanted the market to retreat this past summer because we were uncomfortable investing new money at such lofty valuation levels.  For better or worse, it is Groundhogs Day all over again.

I believe that a fair number of the pundits who keep arguing for the Fed to raise rates are thinking the same way, namely that we need to start having business cycles again.  Yes, that would mean a more pronounced sell-off at some point, but it also means that rather than perpetual slow growth such that businesses fear to invest for the future, we would see both recessions and booms.  Booms are essential for the success of deep cyclical industries like engineering, construction, and mining because it takes time for capital spending in these areas to pay off.

As I said, the bull market seems to have re-exerted itself.  Best then to continue to play the current trend, investing in industries where the return on a dollar invested in the business is fairly immediate.  That means consumer-oriented firms, technology firms, and those companies with the balance sheet flexibility to borrow at low rates to buy back enough stock to improve per share comparisons.

Past performance is no assurance of future results. Trademark Financial Management, LLC (“Trademark”) is a registered investment adviser with its principal place of business in the State of Minnesota. Trademark and its representatives are in compliance with registration requirements imposed upon investment advisers by those states in which Trademark operates. Trademark may only transact business in those states in which it is registered or qualifies for an exemption or exclusion from registration. This newsletter is limited to the dissemination of general information pertaining to its investment advisory/management services. Any subsequent, direct communication by Trademark with a prospective client shall be conducted by a representative that is either registered or qualifies for an exemption or exclusion from registration in the state where the prospective client resides. A complete list of all recommendations will be provided if requested for the preceding period of not less than one year.   It should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities in this list.  Opinions expressed are those of Trademark Financial Management and are subject to change, not guaranteed and should not be considered recommendations to buy or sell any security. For information pertaining to the registration status of Trademark please contact Trademark at (952) 358-3395 or refer to the Investment Adviser Public Disclosure web site (www.adviserinfo.sec.gov). For additional information about Trademark, including fees and services, send for our disclosure statement as set forth on Form ADV from us using the contact information herein or by calling 952-358-3395. Please read the disclosure statement carefully before you invest or send money. Any reference to a chart, graph, formula, or software as a source of analysis used by Trademark Financial Management staff is one of many factors used to make investment decisions for your portfolio.  No one graph, chart, formula, or software can in and of itself be used to determine which securities to buy or sell, when to buy or sell them, or assist any person in making decisions as to which securities to buy or sell or when to buy or sell them.  Any chart, graph, formula, or software used is limited by the data entered and the created parameters. The data was obtained from third parties deemed by the adviser to be reliable. Nonetheless, the adviser has not verified the results and cannot be assured of their accuracy. 

Here’s a look at trends in September:

Quality, large cap companies performed better than market as a whole, and dramatically better than companies with weak fundamentals.<1>

1. Why? “Risk-off” securities were in favor most of the month. (This is no longer true in October).Higher quality bonds continued to outperform lower quality bonds of similar duration.

2. Why? Fear of defaults continues to grow.Capitalization-weighted indices beat equal-weighted indices with the same objective Asia outperformed Europe.

3. Why? The immigrant crisis affected European cohesiveness, leading to a modest sell-off.Frontier markets outperformed emerging markets.

4. Why? Both did poorly, but Brazil specifically was the reason Emerging markets averages were worse. Again, there has been a bounce over the last three trading days.Foreign funds that hedge currency exposure beat un-hedged foreign funds.

5. Why? The dollar had modest relative strength in September largely due to the refugee crisis in Europe. However, the weak U.S. employment report on 10/2/2015 ended that.Large company stocks out-performed midcap stocks, which in turn did better than small cap stocks.

6. Why? There was a clear performance advantage for “risk off” industries like utilities and consumer staples.Growth slightly under-performed value for the second month in a row, which became MORE pronounced after the unemployment report.  A trend change could be at hand.

7. Why? Health care led the way on the down side last month, hurting growth funds a lot more than value funds. Certain sectors that are more associated with the value side – energy, industrials, and financial services – have benefited from the flow of funds out of health care.
   August’s S&P 500 low was re-visited in September, but that bottom held.  See Chart 1.  Investors have clearly been heartened by that fact.  It has climbed above 2000 with impressive breadth, though only modest volume.  Price action is now trading above its 50 day moving average.  If it closes the week above 2000 the implication would be for a run back to the all-time highs above 2100.  Note that the 2000 level was broken on September 16, and we actually hit 2028 intraday on the 17th, before a decisive fall.  It can be dangerous to anticipate a trend change.

   Chart 1

<1> Since the weak employment report on October 2nd, which effectively took Federal Reserve tightening off the table for the foreseeable future, low quality companies have done quite well.

Past performance is no assurance of future results. Trademark Financial Management, LLC (“Trademark”) is a registered investment adviser with its principal place of business in the State of Minnesota. Trademark and its representatives are in compliance with registration requirements imposed upon investment advisers by those states in which Trademark operates. Trademark may only transact business in those states in which it is registered or qualifies for an exemption or exclusion from registration. This newsletter is limited to the dissemination of general information pertaining to its investment advisory/management services. Any subsequent, direct communication by Trademark with a prospective client shall be conducted by a representative that is either registered or qualifies for an exemption or exclusion from registration in the state where the prospective client resides. A complete list of all recommendations will be provided if requested for the preceding period of not less than one year.   It should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities in this list.  Opinions expressed are those of Trademark Financial Management and are subject to change, not guaranteed and should not be considered recommendations to buy or sell any security. For information pertaining to the registration status of Trademark please contact Trademark at (952) 358-3395 or refer to the Investment Adviser Public Disclosure web site (www.adviserinfo.sec.gov). For additional information about Trademark, including fees and services, send for our disclosure statement as set forth on Form ADV from us using the contact information herein or by calling 952-358-3395. Please read the disclosure statement carefully before you invest or send money. Any reference to a chart, graph, formula, or software as a source of analysis used by Trademark Financial Management staff is one of many factors used to make investment decisions for your portfolio.  No one graph, chart, formula, or software can in and of itself be used to determine which securities to buy or sell, when to buy or sell them, or assist any person in making decisions as to which securities to buy or sell or when to buy or sell them.  Any chart, graph, formula, or software used is limited by the data entered and the created parameters. The data was obtained from third parties deemed by the adviser to be reliable. Nonetheless, the adviser has not verified the results and cannot be assured of their accuracy. 

Here’s what worked and what didn’t in August:

Quality, large cap companies did not perform better than market as a whole.

1. Why? Growth is preferred over safety. Investors see this as a correction, not the start of a bear market.Higher quality bonds outperformed lower quality bonds of similar duration.

2. Why? Fear persists that some companies have too much leverage.Capitalization-weighted indices did not beat equal-weighted indices with the same objective.

3. Why? In a sell-off, larger, more liquid companies are easier to sell closer to the last trade.Europe outperformed Asia.

4. Why? China continues to be global issue #1; Greece relegated to back burner.Frontier markets outperformed emerging markets.

5. Why? Both did poorly, but selling was more urgent in emerging markets.Un–hedged foreign fund beat currency-hedged foreign funds.

6. Why? As the correction spread to the U.S., markets preferred the euro and yen to the dollar.Large company stocks slightly underperformed small and mid-cap stocks.

7. Why? Liquidity and foreign exposure were more important considerations last month than business risk.“New economy” stocks slightly outperformed “old economy” stocks.

8. Why? But the edge was dwindling rapidly and over the last week of the month old economy actually did better.There was no clear performance advantage for “risk off” industries like utilities and consumer staples.

9. Why? Utilities really struggled last month, as did real estate, while energy stocks surged in the finally three days. Health care may be breaking down as sector leader.  No clear trend right now.Growth slightly underperformed value.

10. Why? Too early to tell, but we may be on the cusp of a major market change.A Note on Market Leadership

    A market without clear leadership that has technically broken through support is a dangerous one in that it is less likely to hold rallies.  Be careful.

    The Golden Cross

    The Golden Cross is a measure of distance between the S&P 500’s 13 and 34 week moving averages.  It is a useful tool to determine long term market direction.  The level of the spread is also an indicator of the overall tone of the market.  Levels greater than zero indicate bullish market sentiment and levels below zero indicate bearish market sentiment.

    A bearish signal, known as a Golden Cross” is generated when the 13 week moving average crossed below the 34 week moving average.  At that point the spread between the two moves negative.  That occurred early last week and was confirmed when the spread remained negative on Friday (a weekly bearish close).  This week the spread continues to negatively strengthen; further indicating of bearishness in the market.  We look at this technical development as an indication that underlying market dynamics are fundamentally changing.

    Chart 1 looks at the history of the Golden Cross back to 1997.  The cart at top is the S&P 500 (gray line), the 13 week moving average (dark blue line), and the 34 week moving average (red line).  The chart at the bottom is the measure of the distance between the two moving averages.  When the black line on the bottom chart crosses below zero (the solid blue line) it indicates a Golden Cross has occurred.  As you can see, that happened last week and it very strong indication that the market trend is changing. As of yesterday’s S&P 500 close, the distance between the lines was -12.17.  I’ve highlighted in yellow the last three major crosses and, as you can see the indicator has done a reasonably good job of signaling changes in market trend.

    Chart 1

Source: Stockcharts.com

Like all technical analysis work, however, false signals (known as a ‘whipsaw’) occur from time to time.  In 1998 and 2010 a shallow cross occurred only to snap back as the uptrend aggressively re-asserted itself.  In 2011 a more pronounced Golden Cross occurred only to be reversed as the Fed announced quantitative easing.

It’s important to remember that the Golden Cross is a trend following indicator.  It is a necessary, but not sufficient condition, of a bear market.  It does, however, give us a very strong indication that something about this selloff is different and bears close monitoring.  As a result, we are raising cash at the margin and the longer the indicator stays negative the more we will gravitate toward managers with favorable downside capture ratios.

Past performance is no assurance of future results. Trademark Financial Management, LLC (“Trademark”) is a registered investment adviser with its principal place of business in the State of Minnesota. Trademark and its representatives are in compliance with registration requirements imposed upon investment advisers by those states in which Trademark operates. Trademark may only transact business in those states in which it is registered or qualifies for an exemption or exclusion from registration. This newsletter is limited to the dissemination of general information pertaining to its investment advisory/management services. Any subsequent, direct communication by Trademark with a prospective client shall be conducted by a representative that is either registered or qualifies for an exemption or exclusion from registration in the state where the prospective client resides. A complete list of all recommendations will be provided if requested for the preceding period of not less than one year.   It should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities in this list.  Opinions expressed are those of Trademark Financial Management and are subject to change, not guaranteed and should not be considered recommendations to buy or sell any security. For information pertaining to the registration status of Trademark please contact Trademark at (952) 358-3395 or refer to the Investment Adviser Public Disclosure web site (www.adviserinfo.sec.gov). For additional information about Trademark, including fees and services, send for our disclosure statement as set forth on Form ADV from us using the contact information herein or by calling 952-358-3395. Please read the disclosure statement carefully before you invest or send money. Any reference to a chart, graph, formula, or software as a source of analysis used by Trademark Financial Management staff is one of many factors used to make investment decisions for your portfolio.  No one graph, chart, formula, or software can in and of itself be used to determine which securities to buy or sell, when to buy or sell them, or assist any person in making decisions as to which securities to buy or sell or when to buy or sell them.  Any chart, graph, formula, or software used is limited by the data entered and the created parameters. The data was obtained from third parties deemed by the adviser to be reliable. Nonetheless, the adviser has not verified the results and cannot be assured of their accuracy. 

Just a note on what worked and what didn’t in July, because August looks like more of the same.

Quality, large cap companies performed well; leveraged firms did not.

1. Why? As economic fears resurfaced, investors preferred firms with more solid balance sheets.Higher quality bonds outperformed lower quality bonds of similar duration (handily).

2. Why? Greece, China contributed to a risk-off mindset.Capitalization weighted funds beat equal-weighted fund with the same objective as large company stocks beat small and mid-cap stocks.

3. Why? As many active funds continue to struggling versus the major indices, investors are switching to passive. Those switches reinforce index performance relative to funds whose average cap is lower – especially value funds.Europe outperformed Asia by a considerable margin.

4. Why? Greece is insignificant; China is not!Frontier markets outperformed emerging markets.

5. Why? China and Chinese exposure are currently a negative.Currency –hedged foreign fund beat non-hedged foreign funds.

6. Why? The dollar continues to be strong anticipating a rate hike this fall.“New economy” stocks crushed “old economy” stocks.

7. Why? Those who are able to create or deploy productivity enhancing products are doing well; those leveraged to the commodity cycle are hurting. The strong dollar is a big factor.“Risk off” industries like utilities and consumer staples beat risk on industries like industrials and materials.

8. Why? See first two notes on quality above.Growth beat value by a wide margin.

9. Why? Fewer firms and fewer industries are experiencing organic growth – as opposed to growth supported by balance sheet manipulation. Those firms are commanding a higher multiple. Past performance is no assurance of future results. Trademark Financial Management, LLC (“Trademark”) is a registered investment adviser with its principal place of business in the State of Minnesota. Trademark and its representatives are in compliance with registration requirements imposed upon investment advisers by those states in which Trademark operates. Trademark may only transact business in those states in which it is registered or qualifies for an exemption or exclusion from registration. This newsletter is limited to the dissemination of general information pertaining to its investment advisory/management services. Any subsequent, direct communication by Trademark with a prospective client shall be conducted by a representative that is either registered or qualifies for an exemption or exclusion from registration in the state where the prospective client resides. A complete list of all recommendations will be provided if requested for the preceding period of not less than one year.   It should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities in this list.  Opinions expressed are those of Trademark Financial Management and are subject to change, not guaranteed and should not be considered recommendations to buy or sell any security. For information pertaining to the registration status of Trademark please contact Trademark at (952) 358-3395 or refer to the Investment Adviser Public Disclosure web site (www.adviserinfo.sec.gov). For additional information about Trademark, including fees and services, send for our disclosure statement as set forth on Form ADV from us using the contact information herein or by calling 952-358-3395. Please read the disclosure statement carefully before you invest or send money.