Tactical Asset Allocation – August 2023

Tactical Adaptive Strategies Update


Strategy: Adaptive Global finished the month with a loss of 1.16% and a YTD gain of 3.32%.  Adaptive Global is our most broadly diversified “go anywhere” strategy with a 22+ year CAGR of 14.1%, a very modest maximum monthly drawdown of 7.8%, and a low 9.4% standard deviation of monthly returns.

Benchmark: The S&P 500 finished with a loss of 1.63% for the month and a YTD gain of 18.66%. It has a 22+ year CAGR of 6.8%, maximum monthly drawdown of 50.8%, and monthly standard deviation of 15.3%.

Strategy: Adaptive Income finished the month with a gain of 1.26% and shows a YTD gain of 2.97%. With a 22+ year CAGR of 9.2%, this strategy captures $6 dollars of gain for every $1 in loss. Adaptive Income sports our lowest maximum monthly drawdown of 3.9% and our lowest volatility with a monthly standard deviation of just 4.2%.

Benchmark: The iShares Aggregate US Bond Fund  (entirely investment grade) finished the month with a loss of 0.63% and a YTD gain of 1.60%. It has a 22+ year CAGR of 3.7%, maximum monthly drawdown of 17.1%, and monthly standard deviation of 4.2%.

For details, see the links below to strategy descriptions, charts, and tables or the Insights page.


Full Cycle Comparisons

Incredible Bull” in last month's letter led off with ‘Recency bias is a terrible disease to which all too many investors succumb. Fortunately, you have me to pester you with the term “full market cycle”.’ I then went on to compare the relative performance of Adaptive Global and Adaptive Income to their benchmarks for the full (to date) market cycle from the December 2021 high.

After writing that, I thought it would be interesting to develop comparative performance statistics across all four bull/bear cycles we’ve experienced since 2000 as well as the full 23+ years. After quite a lot of tinkering with graphics formats, I developed a graphic presentation which quickly and concisely conveys both Compound Annual Growth Rate (CAGR) and Maximum Monthly Drawdown (MaxDD).

Full Market Cycle CAGR & MaxDD is calculated between bull market tops. Bull and bear markets are signaled by a 20%+ change in the S&P 500 based on weekly closes. Each cycle begins with a bear market and concludes with a bull market. Comparisons are provided to TAAStrategies benchmarks.

Adaptive Global

Adaptive Income

Subscribers have not only enjoyed the higher returns but have avoided some pretty steep drawdowns.

What Do Our Models See?

Market Conditions Model: The Market Conditions Model shifted from Hostile to Balanced at the end of April. The Model remains in Balanced condition for the rebalance at the end of August.

Tactical Model: The Tactical Model calculates TrendScores for both short and intermediate trends for all 27 of the funds we use. The current environment shows most equities in positive trends, high quality fixed income in negative trends, and high yield income in positive trends.

Market Monitor

Note: Market Monitor is a structured weekly process of compiling and analyzing critical information about the health of the markets. I've been doing this for nearly four decades. These are personal observations which have no effect on the TAAStrategies.

From the September 1st Market Monitor

All of the major indexes rallied this week led by the Housing index and small and mid caps. The indexes are generally bullish and falling in the intermediate term and bullish and overbought in the short term. This is a critical point where we expect a pullback to compensate for the short term overbought condition and wait to see how much of a correction we get.

Cumulative Advancing Declining Volume  shows some improvement in both the intermediate and short term although we’ve lost a few more sectors to bearish divergences. Energy, Info Tech, and Materials continue to show above average strength.

The Credit Markets Index declined again this week as a number of credits have shifted from declining spreads to flattening spreads while yields remain mixed between rising and flattening. The Chicago Fed’s Financial Conditions Index continues to show improving financial conditions. Overall, the Credit Markets Index is beginning to show the less bullish conditions I would expect to see with such rapid Fed tightening. The decline in this Index bears watching during the next several weeks.

The 10 year Treasury closed down 7 basis points this week at 4.17% after making a fresh 14 year high last week. The mid and long term ETFs show significant distribution. We now have a cup and handle pattern in the 10 year Treasury which clearly targets 4.62% and a much larger and longer pattern in place which targets 5.00%.

Across other metrics

  • The ValueLine Weekly and Daily models remain on sell signals but should flip on higher highs (risk off)
  • Both VIX Models switched to buy signals. (risk on)
  • The Short Term Breadth Model remains negative but improved (risk off)
  • Consumer Staples are being trashed in favor of Discretionary (risk on)
  • The growth/value ratios are favoring growth in large and small caps (risk on)
  • The Speculation Index is headed down (risk off)
  • Among big tech market leaders: 4 are bullish, 1 is neutral, 2 are bearish (risk on mega tech)
  • Inflation expectations are rising (risk off)
  • The 10 year/3 month Treasury spread remains under -1.0% which is a historically negative level indicating  severe risk of recession.
  • Treasury ETFs continue to show signs of distribution (risk off bonds)

The SPX targets a return to the all-time high at 4819; however the correction which is now underway must be completed first. We are at a critical juncture. The rally from the August 18th low has recovered ¾ of the decline from the July 27th high. Most rallies which fail, fail between the 62% and 78% retracements. Friday’s high nearly touched the 78% retracement.

Short term price momentum has been strong; however breadth is both narrow and lagging. Late cycle sectors are leading. The Credit Market Index is declining but remains positive.

Both equity and credit markets continue to be driven by behavioral economics (psychology) rather than fundamentals. Investor psychology remains positive. Growth is favored over value. Discretionary over staples. The VIX models are confirming the rally.

The bullish trend appears to be a bit more fragile and the risk of failure is rising. I expect a modest pullback here followed by another attempt to push higher; however a sharp move below the August 18 low would indicate it is time to batten down the hatches.

The US appears to have entered a period of fiscal dominance which is proving more powerful than monetary policy. The challenge going forward is that the Federal borrowings will crowd private borrowers out of the credit markets. This should prove interesting during the balance of 2023.

Thank you for reading.

Earl Adamy

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