Seven Metrics is the internal name for our mutual fund tactical rules-based strategy. These seven metrics serve to guide us in tactically managing the portfolio, the approach has expanded over the years as the markets, and economic conditions have continued to evolve/change. We have a rigorous process for both the buy and sell-side of our strategy that is based on the defined listed below. Dunamis is the Seven Metric strategy that has been white labeled for Regal Investment Advisors. Here are the Seven Metrics that we view on a daily basis to manage strategy:
Metric #1 — Federal Funds
The federal funds rate is the interest rate at which depository institutions exchange funds maintained at the Federal Reserve. The Federal Reserve adjusts this rate to manage liquidity in the markets. We examine current rates, historical rates, and future rates.
It reflects federal reserve monetary policy. Generally, only applicable to the most creditworthy institutions when they borrow and lend overnight funds to each other.
We examine current rates, historical rates, and future rates. The federal funds rate is one of the most influential interest rates for the U.S. economy since it reflects federal reserve monetary policy and effects financial conditions.
Metric #2 — Yield
Yield refers to the earnings generated and realized on an investment over a particular period. It's expressed as a percentage based on the invested amount, current market value, or face value of the security. It includes the interest earned or dividends received from holding a particular security. Depending on the valuation (fixed vs. fluctuating) of the security, yields may be classified as known or anticipated.
2-Year Treasury / 10-Year Treasury Yield Curve
We use the slope of the yield curve as an indicator of the overall health of the credit market. If the curve is upward sloping, we view this as a positive sentiment. If the slope of the curve starts flattening, we are cautious and begin monitoring closely.
BAA Corporate Bond vs. 10-Year Treasury Spread
Corporate bonds are characterized by higher yields, in comparison with government treasuries, due to increased default risk. Our management team weighs the risk and return of these bonds against the returns of the 10-year Treasury. If we see a decrease in the moving average spread, we view it as a vote of confidence by corporate America. Conversely, if the range begins to widen, it indicates a higher level of uncertainty in the global financial markets
10-Year Treasury Yield
Treasury bond yields (or rates) are tracked by investors for many reasons. The U.S. government pays the yields on the bonds as "interest" for borrowing money (via selling the bond. The 10-year is used as a proxy for many other important financial matters such as mortgage rates. We monitor bond yields as we feel they are indicative of investor appetite for risk. When confidence is high, investors choose riskier assets over safe-haven bonds. Bond prices drop, and yields inch higher. When confidence is low, there is more demand for safe-haven treasuries. Bond prices go up, and yields fall.
Metric #3 — Technicals
Technical analysis is a trading discipline employed to evaluate investments and identify trading opportunities by analyzing statistical trends gathered from trading activity, such as price movement and volume.
We monitor technical indicators that include investor sentiment, moving averages, and price action in equity markets.
Metric #4 — Volatility
Created by the Chicago Board Options Exchange (CBOE), the Volatility Index, or VIX, is a real-time market index that represents the market's expectation of 30-day forward-looking volatility. Derived from the price inputs of the S&P 500 index options, it provides a measure of market risk and investors' sentiments. It is also referred to by other names like "Fear Gauge" or "Fear Index." We monitor the VIX to measure market risk, fear, and stress.
Metric #5 — Confidence
Confidence plays a vital role in economic growth. The monitoring of consumer confidence is based on the premise that if consumers are confident, they tend to purchase more goods and services, which should, inevitably, stimulate the whole economy. Monitoring CEO confidence helps us determine their views on where the economy is heading as well. CEO confidence is often reflected in capital expenditures (CAPEX).Examples of CAPEX include new projects or investments by a firm.
Metric #6 — Fundamentals
Fundamentals include the necessary qualitative and quantitative information that contributes to the financial or economic well-being and the subsequent financial valuation of a company, security, or currency. Where qualitative information includes elements that cannot be directly measured, such as management experience, quantitative analysis (QA) uses mathematics and statistics to understand the asset and predict movement.
We examine these fundamentals to develop an estimate as to whether the underlying asset is considered a worthwhile investment, and if there is fair valuation in the market.
Metric #7 — Employment
Few economic data points are as closely watched as measures of employment and unemployment. The Bureau of Labor Statistics provides a broad range of statistics covering jobs and joblessness. We examine the jobless numbers and the 4-week moving average of initial claims to determine this metric.