Tactical Asset Allocation – August 2021

Tactical Adaptive Strategies Update

Performance

Adaptive Global finished with a gain of 1.55% for the month and 18.88% Year To Date.

Adaptive Income finished with a loss of 0.28% for the month gain of 7.90% YTD.

Adaptive Innovation finished with a gain of 1.34% for the month and loss of 1.36% YTD.

Adaptive Precious Metals & Bitcoin finished with a loss of 0.26% and gain of 7.07% YTD.

Perspective

In last month’s Perspective, I suggested that both “equity and bond markets appear to be struggling here as they attempt to juggle a cornucopia of issues”.

Tactical Adaptive Global provides broad exposure to domestic and international equities, fixed income, real estate, commodities and precious metals using a total of 22 Exchange Traded Funds. Given the extremely broad coverage, an examination across all 22 funds provides insight into the current market struggles.

  • Of the 22 ETFs, 16 have positive TrendScores while 6 have negative TrendScores including small caps, international equities, precious metals and short term Treasuries
  • Of the 16 ETFs with positive TrendScores, all 16 have lower TrendScores than they had at the July-end rebalance
  • Of the 16 ETFs with positive TrendScores, the 8 highest TrendScores are concentrated in big cap domestic equities and longer term Treasuries. More on this in a moment.
  • The 8 ETFs with the highest TrendScores also tend to have the highest confidence rank.

We don’t generally see rising equity prices and rising bond prices (falling yields) in late stage bull markets. Ultimately, the markets will shift in favor of credit or equities. The Tactical Model will identify that trend and allocate our investment accordingly.

Long Term Holdings

Three of our Adaptive Global funds are entering their 12th month in our portfolio holdings which is a testament to the Tactical Model’s ability to identify and hold trends when the opportunity arises. Domestic big cap equities and commodities have been winning trends.

I suggest using Last In First Out tax lot allocation to maximize the opportunity for LTCG in core allocations.

The TAAS Strategies can maintain an ETF position for a long period while dynamically adjusting the share count up and down during the holding period. This effectively adds and trims shares at the "outer edge" of the position. We can optimize opportunities for Long Term Capital Gains in the core investment by treating the adjustments as short term trades.

…..

I am not a tax advisor; however I have my brokerage account set to apply "Last In, First Out" to the calculation of taxable basis. Using "Last In, First Out" will prioritize positions held the longest for LTCG while changes at the "outer edge" are likely to receive STCG treatment.

We’ll be alert to preserving LTCG at the next rebalance of Adaptive Global.

From the August 27th Market Monitor

All major indexes were up for the week led by small and mid caps, broker dealer, and banking. The S&P 500 intermediate term targets 4531 while the short term targets 4550. 4531 is a blow-off Fibonacci expansion based on the 2007-2009 bear market. 4595 is an extended expansion target based on the 2020 bear market. I expect 4531 to 4595 to provide significant overhead resistance.

Cumulative Advancing Declining Volume improved modestly this week but remains negative. The divergences between price and CADV in all S&P indexes and 10 of 12 sectors are bearish.

The Credit Market Index improved from -42% to -12% this week as spreads began to flatten, and in a couple of cases actually declined. The threat of rising spreads appears to have lessened.

The 10 year Treasury remains within the 38% corrective range this week. As I commented previously: Given the sharp moves up and down, the longer term trend is unclear. Investors appear to be wary of buying into the rise in price (decline in yields).

The current list of caution flags remains large:

  • The Speculation Index continues to trend down.
  • The Russell 2000 failed 6 attempts to break out of a 6 month consolidation; however it posted an impressive rally this past week. Volume divergences remain negative but could improve.
  • Big cap growth has taken over the leadership from value
  • I maintain a chart page with the Big Seven: 4 are trending up, 3 are weak
  • Breadth remains narrow but improved a bit last week
  • The S&P 500 shows 6 Distribution Days (0.2% decline on higher volume) in the past 30 trading days including 2 this week, with 0 Accumulation Days (1% rally on higher volume)
  • The ValueLine Weekly model failed to trigger a Buy signal on repeated new highs in the SPX although it got closer last week
  • The VIX has failed to confirm the new highs in the SPX
  • The Credit Market Index remains negative

Recent comments bear repeating: “Assembling the jigsaw puzzle, I am seeing more and more warning signs that a top of some kind is drawing close. What market actions would ease my concerns? A new high in the Russell 2000. Increased volume on up days. A buy signal from the Value Line Weekly model. Improved breadth.” We should find out this week if this latest rally can deliver.

Thank you for reading.

Earl Adamy

Ready to learn More about the Strategies?

Exceptional results are due entirely to the complementary strengths of our Market Conditions Model and our Tactical Model.

Not ready to subscribe but want to stay in the loop?

Sign up for Earl's Tactical Asset Allocation Strategies newsletter and receive his featured articles and performance updates.

Leave a Comment

Compares performance of the Tactical Adaptive Strategies to the S&P 500 and Vanguard Balanced Index Fund

Supporting tables for Tactical Adaptive Global. S&P 500 (SPY) and Vanguard Balanced Index Fund (VBINX) can be found below

Our backtest results tables are constructed for two full market cycles beginning in January 2000.

The most recent market cycle covers October 2007 to date. The fund baskets for our tactical strategies are constructed from indexed Exchange Traded Funds (ETFs) with just two exceptions, an Open End Fund and a Closed End Fund, both with long history.

The earlier market cycle covers January 2000 through September 2007. A number of the ETFs we use were not created until later in the decade. For those cases, we infill using predecessor Open End Funds (OEFs) for which the indexing and/or subclass is substantially similar to the ETF. Aside from providing insight into possible strategy performance during a second, earlier, cycle, they also offer the advantage of completely out of sample data. The fact that the metrics of both cycles are very comparable appears to validate the process.

We have been asked if it is possible to extend backtests to earlier decades. While this appears to be a common practice with some services; it is not possible to produce credible results for many strategies due to the lack of funds with substantially similar indexing and/or subclass. Doing so would force me to stretch the term "substantial" far beyond my comfort level.

A Caveat

A 35+ year secular bull market in both equities and bonds began in 1982. The last cyclical bull market in equities (and to a lesser extent, bonds) began 10 years ago. Returns during these periods have been historically exceptional. Market returns for the next 10 years are highly unlikely to approach those of the past 10. In fact, there is at least some evidence that market returns have a high probability of being significantly lower and that bonds and equities (which have risen together) may actually begin working at cross purposes.

Investors should not use the statistics shown for our strategies to establish expectations of specific levels of returns or drawdowns. Investors should, however, appreciate that we believe the principles which underlie the Tactical Adaptive Global, Tactical Adaptive Income, and Tactical Adaptive Innovation Strategies are enduring enough to significantly outperform the market in the future, both in lowering risk and in improving returns.

Benchmark S&P 500 (SPY)

Benchmark Vanguard Balanced Index Fund (VBINX)

Compares performance of the Tactical Adaptive Strategies to the S&P 500 and Vanguard Balanced Index Fund

Supporting tables for Tactical Adaptive Income, S&P 500 (SPY) and Vanguard Balanced Index Fund (VBINX) can be found below

Our backtest results tables are constructed for two full market cycles beginning in January 2000.

The most recent market cycle covers October 2007 to date. The fund baskets for our tactical strategies are constructed from indexed Exchange Traded Funds (ETFs) with just two exceptions, an Open End Fund and a Closed End Fund, both with long history.

The earlier market cycle covers January 2000 through September 2007. A number of the ETFs we use were not created until later in the decade. For those cases, we infill using predecessor Open End Funds (OEFs) for which the indexing and/or subclass is substantially similar to the ETF. Aside from providing insight into possible strategy performance during a second, earlier, cycle, they also offer the advantage of completely out of sample data. The fact that the metrics of both cycles are very comparable appears to validate the process.

We have been asked if it is possible to extend backtests to earlier decades. While this appears to be a common practice with some services; it is not possible to produce credible results for many strategies due to the lack of funds with substantially similar indexing and/or subclass. Doing so would force me to stretch the term "substantial" far beyond my comfort level.

A Caveat

A 35+ year secular bull market in both equities and bonds began in 1982. The last cyclical bull market in equities (and to a lesser extent, bonds) began 10 years ago. Returns during these periods have been historically exceptional. Market returns for the next 10 years are highly unlikely to approach those of the past 10. In fact, there is at least some evidence that market returns have a high probability of being significantly lower and that bonds and equities (which have risen together) may actually begin working at cross purposes.

Investors should not use the statistics shown for our strategies to establish expectations of specific levels of returns or drawdowns. Investors should, however, appreciate that we believe the principles which underlie the Tactical Adaptive Global, Tactical Adaptive Income, and Tactical Adaptive Innovation Strategies are enduring enough to significantly outperform the market in the future, both in lowering risk and in improving returns.

Benchmark S&P 500 (SPY)

Benchmark Vanguard Balanced Index Fund (VBINX)

Compares performance of the Tactical Adaptive Strategies to the S&P 500 and Vanguard Balanced Index Fund

Supporting tables for Tactical Adaptive Innovation, S&P 500 (SPY) and Vanguard Balanced Index Fund (VBINX) can be found below

The Innovation ETFs used in the Innovation Strategy were not established until 2014-2015 so our history is limited. There are no predecessor funds which are similar enough to use for infill.

A Caveat

A 35+ year secular bull market in both equities and bonds began in 1982. The last cyclical bull market in equities (and to a lesser extent, bonds) began 10 years ago. Returns during these periods have been historically exceptional. Market returns for the next 10 years are highly unlikely to approach those of the past 10. In fact, there is at least some evidence that market returns have a high probability of being significantly lower and that bonds and equities (which have risen together) may actually begin working at cross purposes.

Investors should not use the statistics shown for our strategies to establish expectations of specific levels of returns or drawdowns. Investors should, however, appreciate that we believe the principles which underlie the Tactical Adaptive Global, Tactical Adaptive Income, and Tactical Adaptive Innovation Strategies are enduring enough to significantly outperform the market in the future, both in lowering risk and in improving returns.

Benchmark S&P 500 (SPY)

Benchmark Vanguard Balanced Index Fund (VBINX)

This strategy is intended to capitalize on trending moves in both precious metals and bitcoin if and when they occur while managing volatility to reduce risk. The strategy, which uses a basket of precious metals, bitcoin, and Treasury funds, selects the single best fund each month although it provides blended allocations when necessary to manage volatility.

Bitcoin is a relative newcomer to investable assets and we take no position as to whether bitcoin is or is not a sustainable asset class. The Grayscale Bitcoin Trust used in this strategy was not established until 2015 so our history is limited. There are no predecessor funds which are similar enough to use for infill.

The CAGR in 2017 is extraordinary; however the bitcoin trust rose 1893% from $1.17 to $22.15 during this period. While the strategy remained invested in bitcoin for 10 of the 12 months, volatility weighting significantly reduced the weighting to bitcoin from a low of 14.6% to a high of 68.0%. The use of Treasuries to manage bitcoin volatility accounts for the high percentage invested in fixed income assets.

Volatility weighting has little effect on precious metals which typically receive a 100% weight when selected.