Friday a Bloomberg headline read One of Wall Street’s Most Poplar Trading Strategies is Failing, referencing the implosion of risk based parity models and Commodity Trading Advisors (CTAs) which have grown exponentially since 2008.

Bloomberg writes “the community of quantitative investors—computers designed and encoded to identify trades and execute them—expended exponentially and their algorithms grew more sophisticated.  The major problem is too much money chases the same trends which are creating unstable and perhaps illiquid markets.”

Bloomberg writes robotic traders now manage about $1 out every $3 based upon models using “inputs like profitability, dividend yields, volatility and momentum utilizing sophisticated back testing models”  The emerging industry of “Robo Investing” is an offshoot.

Bloomberg opines the issue at hand is that these “algos” are not good at responding to surprises or “fundamental changes in the political or monetary environment,’ inferring that such believe past performance is indeed indicative of future performance.

Bloomberg further writes “it is a strategy which in its purest terms is really obsolete” utilizing February and December 2018 as evidence that really exposed the weaknesses of CTAs and “quant” models, a weakness that has been present for over two years but is becoming even more pronounced.


Radically changing topics, February’s employment data is released Friday.  Generally speaking recent data is either indicating greater than expected weakness or greater than expected growth.  I believe Friday’s data could be instrumental in determining the underlying strength of the economy and the possible direction of monetary policy.

Last week I referenced 1994, the greatest bond implosion in a generation that sent Treasury  yields from 5% to 8% in about six months.   The initial catalyst was March’s employment data released on Good Friday, a quasi-holiday.  Treasuries fell 7 points that day, partially the result of the lack of liquidity.  March’s data shattered the illusion of a non-inflationary, low growth environment.

Will history repeats itself?  As stated above, the data has been contradictory, perhaps the result of the government shutdown.

Speaking of data, February’s ISM was disappointing albeit the statistics indicated the manufacturing sector of the economy is still expanding robustly.  Led by technologies, equities rose but Treasuries fell.

Last night the foreign markets were up.  London was up 0.70%,  Paris up 0.64%  and Frankfurt up 0.24%.  China was up 1.12%,   Japan up 1.02%  and Hang Sang 0.51%.

The Dow should open nominally higher on trade optimism.  In my view complacency is growing in the Treasury market, especially regarding “Modern Monetary Theory” or “MMT” which espouses the idea that deficits do not matter.  Is this Janusian thinking at its best?  I think yes.  Al has to remember it is not what you write but rather why you write it.    The 10-year is unchanged at 2.75%.

The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. The information contained herein has been compiled from sources believed to be reliable; however, there is no guarantee of its accuracy or completeness. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. The material provided in Daily Market Commentaries or on this website should be used for informational purposes only and in no way should be relied upon for financial advice. Please be sure to consult your own financial advisor when making decisions regarding your financial management. Members of FINRA and SIPC, Capitol Securities Management is a privately owned full-service retail brokerage and investment advisory firm headquartered in Richmond, Virginia. For nearly 30 years, we have been serving the needs of our investors. Today, more than 200 Capitol Securities Management investment professionals and support staff serve approximately 18,000 customer accounts from Southern Florida to the New England coast.