Tactical Asset Allocation Strategy Update
Global Core is down 0.24% for April and down 1.73% for the year to date.
A "Correction" is an equity market decline greater than 10% and less than 20%; in short a significant interruption of a Bull or Bear market trend. Tactical Asset Allocation models are very effective in identifying Bull trends and Bear trends but they are challenged during Corrections when there is no trend. This tends to produce a series of frustratingly small gains and losses until the original trend resumes or a new trend begins. This is what we have been seeing recently; however, if history is any guide, Global Core should being finding a trend very soon.
(partial comment from last weekend's Market Monitor): "Overall, I think the longer term probabilities now favor continuation of the Correction followed by a much deeper correction or bear market. Technicals aside, there are simply too many fundamental issues (interest rates, growing debt, trade, foreign exchange, inflation, GDP, and political uncertainty) which will increasingly weigh on the bull market enough to bring it to an end. In short, the “sweet spot” is likely behind us. While I would not be surprised to see nominal new highs (as high as 3044) within the next few months, based on what I see now, I will be surprised to see any new high hold for long. That could, of course, change if the market returns to full health however the probabilities of that happening appear to be rather low."
Technically, the equity market continues to hover just above the Trendline from the February 2016 Correction low. That trendline pretty well defines the 50% rally in the S&P 500 from its 1812 low and it appears increasingly likely that the trendline is going to fail. Concurrently, the 10 Year Treasury continues to hover near the 3% level last seen at the beginning of 2014. While a break in equities may provide some relief to Treasury yields, Treasury yields are facing their own set of issues as the trend in fixed income shifts from bullish to bearish.
It is abundantly clear that we are in very late stages of this bull market and it is not uncommon for tactical strategies to lag a bit in late bull markets. However this is more than compensated for by reduced bear market drawdowns and early bull market out-performance.
While I expected a first quarter Correction, it has since has extended three months and well into the second quarter. If it equities are going to make another run for the highs as it did in 2000 and 2007, it probably needs to get a start this month. On the other hand, the market is trading heavily and it is not difficult to imagine a break lower. In any event, we should see a resolution rather soon.
I believe that the next market triggering event is going to come from the credit markets which is why I spend so much time monitoring them. The 10 Year Treasury has risen to 2.98% just 2 basis points shy of the critical 3% level. A weekly close at or above 3.01% would cement the nearly six year pattern of shifting momentum (from down to up) in the 10 Year Treasury yield. Investment Grade and High Yield rates have risen in concert which means that the costs of borrowing money are rising as well as the costs of refinancing the large pile of debt coming due this year and next. I think we are going to see continued pressure on interest rates.
Credit spreads are also rising. The fact that the majority of High Yield debt is being issued (and refinanced) under "Covenant Lite" conditions tells us that the default rate will eventually soar far above historical averages. Overall, the tightening trend signals the very early stages of credit contraction.
My general outlook is that Treasury rates will rise gradually until the markets blink. We'll know that the markets are blinking because the spreads will tell us. The Fed will blink afterward. A crash will see a flight to safety in Treasuries (lower yields again) while corporate and high yield go their own ways. Once the markets stabilize, Treasury rates are going to start rising again as debt, currency, and inflation issues take center stage.
The often cited rationale (low interest rates and low inflation) for the historically extreme valuations has been kicked out from under the market. The 10 Year Treasury is more likely to remain range bound around 3% or move higher. Inflation appears to be on the move upward.
I am making good progress in developing our third generation Tactical Model which will manage a much broader basket of assets, provide improved trend identification, and dynamically adjust portfolio positions based on current levels of volatility.
I have completed work on a preliminary basket of funds which emphasizes both domestic and international diversification across equities, fixed income, and commodities. This will provide the Model with maximum opportunity to adapt to future market conditions even if they are unlike anything in the past three decades. I expect future conditions to be far more similar to the 1966-1980 period.
My current efforts are focused on Improving trend identification. A thorough reading of research papers on TAA going back to the 1970's reveals that development of virtually all TAA models has been based on using fixed length periods for trend identification. (A simple example would be calculating the change in price over a fixed period of 10 months.) While use of fixed length periods has proven far superior to "buy and hold" over many decades of testing; the period selected is either arbitrary and/or optimized to previous history. I believe that I have the technology required to intelligently and dynamically adapt momentum period lengths to current market conditions and this is where my research is concentrated.
Daily and Weekly Website Updates
The Proforma "Portfolio" page is updated in near real-time with daily and month-to-date performance. I generally get dividends posted within a day or two of x-date. This page now includes the date of the next Rebalance Notice as well as the next Rebalance Date.
The "Market Monitor" page is updated each weekend. It provides an updated assessment on the health of the equity market as well as interest rates, commodities, and precious metals.
Tactical Asset Allocation Strategy Performance
Global Strategy (Conservative)
Month: 0.15% loss
Year-to-date: 1.51% loss
Full cycle-to-date (Sep 2007): 12.82% CAGR, 5.87% Max Monthly Drawdown
Global Strategy (Aggressive)
Month: 0.15% loss
Year-to-date: 1.51% loss
Full cycle-to-date (Sep 2007): 15.93% CAGR, 8.22% Max Monthly Drawdown
Tactical Asset Allocation Fund Basket Performance
Month-to-date: 0.15% loss
Year-to-date: 1.51% loss
Full cycle-to-date (Sep 2007): 9.7% CAGR, 6.5% Max Monthly Drawdown
Global Satellite (includes Favorable & Hostile)
Month-to-date: hibernating since Jul 2016
Year-to-date: hibernating since Jul 2016
Full cycle-to-date (Sep 2007): 20.9% CAGR@Risk*, 8.22% Max Monthly Drawdown
*CAGR for the Favorable and Hostile Market Conditions during which Global Satellite was invested