Our Core Satellite strategies followed the market lower in November and delivered negative returns between -2.96% and -2.24%, depending on the version of the strategy invested in. These figures are slightly lower than benchmark returns for the month, but on a year to date basis, all versions of the Core Satellite strategy continued to exceed benchmarks with an outperformance range of 5% to 10%, again depending on the version of the strategy invested in. Likewise, since inception performance relative to benchmarks continues to be strong.
Similar to October, the Financial and Healthcare sectors continued to blow off some steam after a good run higher in previous months. Core Satellite was overweighted in those sectors and continues to be as we see above average performance potential in those sectors, despite the short term pullback.
Our current satellites are focused on the financial and healthcare sectors, which continue to exhibit above average return potential in our opinion, as indicated by our special blend of technical analysis signals, including Relative Strength, Money Flow, and MACD.
We do expect that the overall market will continue to experience price declines, possibly leading to a bear market in Q4 or Q1, and we will be watching the technicals closely for signs that our current sector selections are still the right choices, or if there are other sectors that begin exhibiting more resilience in the face of the expected continuation of market declines.
Tactical Risk Management strategies modestly negative returns clustered closely around -1%. These figures were mostly in line with benchmarks for the month of November, with the more aggressive versions slightly outperforming and the more conservative versions slightly underperforming.
Risk levels in the market remained elevated throughout the month of November, and as the objective of TRM is to move assets into defensive positions during times of heightened market risk, TRM was largely on the sidelines throughout the month as the broader market rallied marginally in the beginning of the month, topped toward the middle and began selling off at the end. Risk continues to be elevated, and so TRM continues to be defensive. In fact, the rise in prices to new highs has actually served to elevate the risk in the long term, even if in the short term there has been positive gains. TRM’s strategy does not attempt to “pick tops and bottoms” in the market, rather it is designed to take the temperature of the market and gauge the level of risk at a given time, and attempt to increase or decrease exposure to risk assets based on that analysis.
Our analysis of the market structure continues to favor the verdict that we are in the end stages of the run up off of the COVID lows from March 2020 and as such remains in defensive positions. The broader market formed a top in November with a bearish divergence with Money Flow, and then sold off several percentage points, adding to the fragile structure of the market. It is possible that prices could stage a rally to new highs from here, but in our TRM technical analysis the probabilities are stacked against those odds presently, so we will continue to watch closely from the sidelines for either a signal that risk is abated and it is reasonable to move back into risk assets, or for confirmation that our bearish outlook is the right one as prices fall from present levels.
For the month of November 2021, FEVR -3.43% vs -0.80% S&P 500 and -3.95% MSCI USA Momentum (MTUM). GLRY -6.10% vs –3.01% S&P Mid Cap 400 and-3.95% MSCI USA Momentum (MTUM).
Both GLRY and FEVR had strong starts to the month, both beating the momentum benchmark by a fair spread. However, as the month proceeded, interest rates rose sharply. This is a headwind for most high-growing, low-earning information technology companies, and we expected some underperformance relative to the broad market. However, we did not see the market de-risking so sharply in the last week of the month, especially with rates coming back down. Following Black Friday’s -2% day, underperformance weighed heavier on mid-cap companies and heaviest on mid-cap momentum.
As we enter the final month of the year, we need to take a balanced approach. First, portions of the market are beginning to de-risk, and year-to-date winners are being sold (e.g., cryptocurrencies, some commodities, high-growth companies, and inflation trades). Potential “gray swans” are on the horizon as well, with issues arising in Russia, China, and Eastern Europe. On the other hand, the market may be driven up by structural forces that need to purchase more equities, as well “discount shoppers” looking to buy into recent weakness.
Another key insight to reference lies in the Cboe VolatilityIndex (VIX). It tracks implied volatility in a fairly robust way, but put simply, it tracks how much the overall market is moving around. Usually, a high number is a sign of market weakness, and values below 20 generally reflect market stability. Over the past 25 years, the VIX has climbed into the 25-30 range for short periods of time when there is some fear in the market, but it hasn’t stayed above that without significant financial stress (e.g., ’08 Financial Crisis, European crisis, and early COVID). With the VIX nearing 29, we expect volatility to begin retreating soon. This is a mechanism that can support dip buying behavior.
To wrap up November, we stand excited to fight another month. We are framing 2022 as a “show me” time period for real businesses to match market expectations, and we expect December to start that theme early.
For the month of November, the Inspire Tactical Balanced ESG ETF (RISN) underperformed the S&P Target Risk Moderate Index. Year to date, the Inspire Tactical Balanced ESG ETF (RISN) has outperformed its benchmark (S&P Target Risk Moderate Index) by 12.64% according to Morningstar.com.
The fund underperformed the S&P Target Risk Moderate Index by 0.73% (according to Morningstar.com) for the month and we attribute this underperformance to the 80% exposure to the large cap US stock holdings. The US stock market decreased in November, and the filtered US large cap stocks held within the fund (Inspire 100 Index) underperformed the overall US large cap stock market (S&P 500) for the month. Our 20% allocation to long-term US treasuries added to the returns, increasing by 2.71% for the month, showing strong negative correlation with the US large cap stock market and helping to limit our overall volatility.
We continue to monitor the US large cap stock market to see if the trend/momentum remains in an upward direction. Inflation fears and the potential tightening by the FED caused the index to decrease in November, so we are keeping our eye on the trajectory of the Inspire 100 index to see if it warrants a reduction in our overall allocation in the months to come. We decided to remove our gold allocation during the month of September and add to our long-term treasury allocation. This helped us in November as the long-term treasury holding outperformed the price increase in gold by 0.75%. We also continue to monitor the long-term US treasury holding as the potential for higher interest rates and higher inflation may impact the performance of this holding in the future; at which point we would consider moving back into intermediate-term treasuries for that portion of the fund. Intermediate-term treasuries have a very low volatility historically, but due to their lower duration, have not helped to offset price declines in the US stock market as much as have long-term treasuries. We will continue to try and keep an intelligent mixture of these two based on the current trend of interest rates and inflation. However, our goal is to always keep a small portion in these asset classes to help minimize the overall volatility of the fund.
You can learn more at www.inspireetf.com/risn.
Issachar lost -3.01% in November, while the IQ Hedge Multi-Strategy Index lost -1.52%, so Issachar underperformed its benchmark. Issachar started November well; peaked mid-month, then declined into month-end as Omicron and Powell taper fears triggered an equity sell-off. Growth stocks were hit especially hard as yields peaked, putting more pressure on growth than value stocks. The Fed announced an earlier taper of its bond purchases due to inflation concerns that are no longer “transitory.” Junk bonds began rolling over in a steep fashion indicating investors may have lost their risk appetite. The dollar spiked higher, and we saw a flight to safety in US Treasury bonds. Higher month-end risk quickly eroded prior mid-month gains forcing Issachar to a 100% cash position on November 26th. After careful post-analysis, new rules have been written to cut losses at 10% and sell stocks after a 20% gain. These new rules are designed to keep more of the upside and reduce downside risk.
If the Fed keeps printing money and does not taper as they announced, the market could continue to climb higher. If the Fed tapers its bond purchases sooner than the market expects, we could see a serious correction unfold quickly. The Fed created over $4.5 trillion out of thin air since the COVID crash last year, and the S&P 500 has risen over 50%. One could make a case that the market is addicted to “easy money,” so getting off the “money high” might be difficult. Issachar can profit in decline by shorting at the advisor’s discretion.
Junk bonds have crossed their 50-day moving average on the downside, indicating a higher risk environment. Gold and Bitcoins have not been the safe-haven trade as expected, but Treasury bonds have seen a flight to safety instead. This has not been a low-risk environment for investors, but that could change if the Fed ignores inflation and keeps flooding the market with liquidity. However, if junk bonds continue to come under heavy selling pressure, Issachar is likely to remain defensive. Winning by not losing can offer a little less stress.
Oil was down over 16% in November, indicating the economy may indeed be slowing. The Omicron COVID variant (scarient) fears of more lock-downs, masks, and vaccine mandates have the market on high alert. Fear is a more powerful emotion than greed, and there is a lot of fear purposely being spread by the Biden administration. The more people are scared, the easier they are to control, but we do not operate from a position of fear. We are followers of Christ, and the Bible says, “fear not.” Praise Jesus!
You can learn more at www.issacharfund.com/performance/.
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IMPORTANT RISK INFORMATION
Mutual Funds involve risks, including the possible loss of principal. An investment in the Fund may not be appropriate for all investors. The Adviser's judgment about the attractiveness, value, and potential appreciation of particular asset classes and securities in which the Fund invests may prove incorrect and may not produce the desired results. There is no guarantee that any investment will achieve its objectives, generate positive returns, or avoid losses.
Investors should carefully consider the investment objectives, risks, charges, and expenses of the Issachar Fund (LIONX). This and other important information about the Fund are contained in the prospectus, which can be obtained by calling 1-866-787-8355. The prospectus should be read carefully before investing. The Fund is distributed by Northern Lights Distributors, LLC, member FINRA/ SIPC. Horizon Capital Management Inc. and Inspire Investing are not affiliated with Northern Lights Distributors, LLC. NLD Review code: 5717-NLD-12/1/2021