Interested in finding out where you and your clients need to be positioned as we open the back half of the year?  Join our team next Wednesday, July 16th at 1PM EST in our Quarterly Webinar to discuss the "Weight of the Evidence" as we enter what will undoubtedly be a busy back half of 2025. NDW's Senior Portfolio Manager, John Lewis, will discuss what he has his eye on from a technical perspective,  while Nasdaq's macroeconomic experts Phil Mackintosh and Yanni Angelakos keep you up to date with all the latest headlines and what you need to know to cut through the noise.

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While most US Equity indices finished Monday’s trading in negative territory, bullish percent (BP) indicators actually increased – suggesting more stocks were giving buy signals on their point and figure charts. The bullish percent for the S&P 500 (^BPSPX) - which maintains the highest reading among the major BPs discussed - reversed back into Xs at 74% after having been in Os since early June, while the BP for NYSE stocks moved above 60% in its current column of Xs that has been in place since April. ^BPSPX was preceded by the bullish percent for the S&P Mid Cap 400 (^BPSPMID) moving back into Xs early last week, and the BP for the S&P Small Cap 600 (^BPSPSML) having maintained a column of Xs since late April.

Examining the current breakdown of S&P 500 (502 stocks technically) reveals 372 stocks maintaining point and figure buy signals. Among those, the majority maintain high technical attribute ratings (TA ≥ 3) with the largest number being 5 for 5’ers. Additionally, while lower technical attribute stocks returning to buy signals may seem like an opportunity, NDW followers will look for high attribute names that have maintained positive long-term technical pictures and may trade within actionable price ranges.

The table below shows the forward returns of the S&P 500 Index (SPX) based upon positioning of the bullish percent (^BPSPX). Reversals to the current chart position for the  ^BPSPX have historically seen muted returns in the short-term for the index before intermediate to longer-term returns improve. This doesn’t mean indices are meant for an impending collapse in the coming weeks, as elevated levels on the bullish percent are signs of a healthy broader equity space. Given the near-term uncertainty prevalent within the broader market around tariffs, rates, etc., investors may not be surprised by an uptick in volatility and/or pullback from equity index highs. If/when that may occur, NDW users will want to closely monitor participation levels and whether stocks can continue to maintain buy signals.

One of the defining features of markets over the last decade has been relatively high correlations between asset classes, particularly in times of panic when, “everything correlates to one.” This creates a problem in portfolio construction as benefits from diversification don’t help as much as many would expect. The prevailing notion of this risk, known as systematic risk, is that it is unavoidable. While this may be mostly true if an investor exclusively holds equities or fixed income, there are ways to help mitigate this risk. Uncorrelated assets, often referred to as alternatives but not always, can help reduce portfolio volatility and offer returns that behave differently than the normal equity/fixed income allocation. In the image below, the correlation matrix between traditional assets and alternative assets are displayed. Gold (GLD), oil (USO), US Dollar (UUP), real estate (FRIFX), and short-duration bonds (SHV) make up the “alternatives” universe while US equities (SPY), international equities (ACWX), and bonds (AGG) round out the traditional asset lineup. The correlation matrix looks at monthly correlations over the last 36 months.

There are other asset types that are uncorrelated or considered alternatives, but we’ll keep the list short for today’s purposes. The next step is finding a way to fit these alternatives into a portfolio as a sleeve. As an example, the allocation below shows how an alternatives sleeve could come together. For the most part, the holdings are a static blend between the assets except for oil. To maintain the possibility of oil exposure without holding it indefinitely, we’ve made a basic model that either holds gold or oil based on which fund, GLD or USO, holds a higher fund score at the end of each month. While very simple, it is an effective way to manage oil exposure for an alternative sleeve’s purpose. The holdings and stats of the hypothetical alternative assets portfolio are shown in the image below (benchmarked against the S&P 500). A few key observations:

• The cumulative return for the alts model is well off that of SPX (365% vs 628%, respectively)
• The max drawdown for the alts model over the backtest is -26.60% vs -56.78% for the SPX
• Beta and correlation of the alts model are 0.17 and 0.26, respectively, which shows that the portfolio is much more uncorrelated than asset classes like international equities or fixed income
• Downside market capture is -1.50 while upside market capture is 28.55 which shows that weak periods for US Equities have little to no impact on the hypothetical alts portfolio

Now that we have an alternative asset model, it’s time to plug it into a portfolio to test whether it is additive. As our base portfolio, we’ll use the GSM Moderate Allocation model which represents a tactical portfolio with most of its allocation in normal times to US equities, international equities, and fixed income. The test portfolio will be 80% GSM Moderate Allocation and 20% the alternative assets portfolio shown earlier. Both the base and test portfolios are benchmarked to the DWA6040 Index. As one would expect, the GSM Moderate Allocation model by itself performed better when just looking at raw returns. However, the portfolio that had 20% in the alternative assets sleeve did better on a risk-adjusted basis whether looking at standard deviation, Sharpe Ratio, max drawdown, or downside vs upside market capture spreads.

There is a clear give and take of including alternative or uncorrelated assets in a traditional portfolio allocation. While headline returns may fall a bit, the uncorrelated assets help mitigate risks while still allowing for the overall portfolio to perform well. Ultimately, alternative assets can be useful in a variety of ways whether it’s attempting to lower volatility for retirees or protecting high-net worth clients. In any case, having the ability to use alternatives is a selling point most advisors do not have in their toolkit and can be a value add for you and your clients.

Daily Option Ideas for July 8, 2025