Tactical Asset Allocation – August 2018

Tactical Asset Allocation Strategy Update

Performance

Global Adaptive was up 1.99% for August and is up 5.66% for the year to date. While all positions advanced, gains were led by strong performance in small and mid caps, followed by big caps and real estate.

Market

The market has ascended to new highs but while the February decline took 1 month, it has taken the S&P 500 6 months to return to its previous high. The rally has been marked by modest advances followed by large retracements. While this can continue indefinitely, the repetition of large retracements is a sign of weakness. I have a target at 3045 which may yet be achieved; however the conditions for holding the new highs do not appear to be favorable.

Interest rates have pulled back this month as have credit spreads so a top does not appear to be imminent. I do think that odds favor a resurgence in the yield of the 10 Year Treasury and have a target at 3.45% and the odds of going there are higher than the market expects.

Two words: "secondary high", sums up my current equity market outlook. By secondary high, I refer to a high which may be lower or nominally higher than a previous high but one which completes an important market top.

My general outlook is that Treasury rates will rise gradually until the markets  blink. We'll know that the markets are blinking because the credit 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.

Global Adaptive Strategy

Subscribers were provided access to the Strategy in time for the July 31 rebalance and are now using the new Strategy exclusively. The TAAS website has been completely updated and the Strategies page presents a simplified explanation of the three step process together with a chart and table detailing performance. I am currently working on a White Paper which explains Adaptive Dynamic Momentum in more detail as well as a multi-part article describing our unique approach to Tactical Asset Allocation.

The more I use and test Global Adaptive, the more enthusiastic I become about the breadth of the basket and the improved trend identification and selection provided by Adaptive Dynamic Momentum. This is exactly the kind of strategy I wanted to ride out whatever lies ahead.

100% of our TAAS portfolio is allocated to the Strategy.

I've still got quite a list of interesting ideas for which I need to do further Model development. In particular, I want to revisit the Market Conditions Model where I think incorporating Adaptive Dynamic Momentum may give us a further edge in more quickly identifying critical changes in market conditions.

Daily and Weekly Website Updates

The Proforma "Portfolio" page (which now includes both old and new strategies) 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.

Earl Adamy

Tactical Asset Allocation Strategy Performance

Global Adaptive Strategy

Month: 1.99% gain
Year-to-date: 5.66% gain
Full cycle-to-date (Sep 2007): 17.9% CAGR, 8.7% Max Monthly Drawdown

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