SEC moves to amend its circuit breaker rules

New reforms focus on issues that exacerbated the 2015 flash crash

Eric PollackovThe events of Aug. 24, 2015, were a wake-up call for many in the exchange-traded fund (ETF) industry. After a market selloff in Asia spread to North America on that day, a flash crash ensued — creating upheaval in the US equity markets. In addition to widespread market volatility, ETFs were hurt by diminished liquidity and price dislocation. This was due in part to the breakdown of trading mechanisms that were designed to prevent volatility.

Within a year, the Securities and Exchange Commission (SEC) enacted several changes designed to stem market volatility, including abolishing its controversial Rule 48 — a mechanism designed to ensure orderly trading, but one that created its own set of problems.

Left unresolved were harmonization between exchanges and the shortcomings of “limit-up/limit-down” rules. These rules were originally intended to put the brakes on extraordinary market volatility by halting trading in a security. But they occasionally do the reverse by reducing price visibility and preventing a security from recovering after a sharp price drop.

These issues are now being addressed. On Jan. 19, the SEC moved to amend its circuit breaker rules — formally known as The National Market System Plan to Address Extraordinary Market Volatility — by adopting what’s known as Amendment 12.

What is Amendment 12?

Continue

What does it mean to invest in today’s technology companies?

As innovation surges, traditional sector lines are being blurred

JohnFrank_smThe days of traditional technology are dead. The Mac, the Windows operating system and the microprocessor are no longer the sole drivers of revenue for their respective tech companies. Today’s technology companies are increasingly blurring the lines between technology, media, infrastructure and global consumer enterprises.

Technology as a driver of innovation

At the same time, traditionally non-tech companies are either grappling with or embracing technology as a critical driver of innovation and business success. Technology is no longer the shiny front end of the organization or just a feature that can be used to differentiate a company. Today, technology is integrated into every aspect of most companies.

Imagine trying to run a company without Microsoft Office or a web browser. As digital technologies continue to transform the economy, legacy companies are fighting to remain competitive and participate in emerging trends. Walmart’s acquisition of the e-commerce site Jet.com to compete with Amazon is a prime example of how technology has forced the hand of corporate institutions to embrace the future or risk obsolescence (Amazon comprised 6.31% of PowerShares QQQ as of Dec. 31, 2016.)

For companies beyond the information technology (IT) sector that are succeeding — those that are growing their balance sheets, creating new products and jobs — technology is becoming their lifeblood. Technology’s critical role across today’s economy sparks some interesting questions about what we consider technology today and how to invest in it.

What does technology mean today?

Continue

Expectations for a strong US dollar in 2017 may be losing currency

The degree of interest rate divergence between US, international markets could determine US dollar’s direction

Bloom Jason_sm_150dpi_RGBThe US dollar moved sharply higher against the world’s major currencies in 2014 and 2015 — creating a strong dollar environment in the truest sense of the term. US investors experienced the results of a stronger dollar in the form of tepid economic and profit growth, and muted inflation.

Despite persistent media headlines to the contrary, the currency backdrop has been more nuanced since early 2016. Indeed, the US dollar, as measured by the Bloomberg Dollar Index, traded in negative territory from mid-February through mid-November 2016, not reaching positive territory until after the November US elections.1

Limited upside for US dollar in 2017?

Continue

Examining factor performance in the fourth quarter of 2016

Small caps and value stocks shined amid a period of wide performance dispersion

Nick KalivasFactor returns showed wide dispersion in the fourth quarter, with a nearly 20% spread between the best and worst performers.1 During the quarter, investment performance was powered by economic fundamentals and expectations of additional economic and profit growth following November’s elections.

Fourth-quarter factor performance influenced by investor expectations

The US economy was already on an upswing before Nov. 8, but some market participants are anticipating potential  deregulation and tax cuts with the incoming Trump administration. If enacted, such policies could further stimulate the economy, although some market observers are concerned about potential trade disruptions. These expectations alone were enough to influence factor performance late in the fourth quarter.

Below are fourth-quarter 2016 factor returns. Note that I’ve added additional performance data covering the period following the Nov. 8 elections through the end of the year.

Continue

Using factor analysis to explain the performance of dividend strategies

Factor tilts have resulted in divergent dividend strategy performance following the November elections

Nick KalivasNovember’s US elections have buoyed investor optimism about the potential for tax reform, increased infrastructure spending, reduced regulation and accelerating economic growth. These expectations led to a 0.75% spike in the 10-year Treasury yield between Nov. 8 and Dec. 16, and a 5.2% increase in the US dollar, as measured by the US Dollar Index.1

Still, by historical standards, interest rates remain low. Nearly a decade ago, the 10-year Treasury yield finished 2007 at 4.02%; it now stands near 2.50%.1 When adjusted for inflation, even the 0.75% bump in the 10-year Treasury yield amounts to a modest 0.40% increase. Compare that with the average annual real (inflation-adjusted) increase in the 10-year Treasury yield between January 1962 and November 2016 of 2.40%.1

Shouldn’t dividend stocks be underperforming?

Continue

2016: A rebound year for commodities

Following last year’s rate hike, commodity performance has been consistent with historical trends

Bloom Jason_sm_150dpi_RGBEarlier this year, in a blog titled, “Commodities: When it’s darkest before the dawn,” I suggested that the bottom may be near for commodity prices and highlighted what my team and I believed was an emerging opportunity to catch a cyclical turn that was developing in the broad commodity markets.

At the time, we expected low commodity prices, which had been exacerbated by a Saudi-led crude oil price war, to rebound during the year. We based that opinion in part on commodity price activity over the past 40 years. In response, we heard a lot of statements to the effect of, “That’s all well and good, but everything is different now.”

But throughout the course of 2016, a quote from the celebrated British journalist Malcolm Muggeridge often came to mind: “All news is old news happening to new people.”

Commodities on a roll in 2016

Continue