Tactical Asset Allocation – February 2019

Tactical Asset Allocation Strategy Update


Global Adaptive declined 0.91% for February and 0.62% YTD. Our positions in precious metals and Treasuries struggled during the month.

This is the comment which accompanied the allocations at the end of January: "Our Global Adaptive Strategy for February shows domestic and international equities and commodities under duress while precious metals and fixed income show high confidence positive trends. The Tactical Model selected positions in precious metals and mid to long duration positions in Treasuries."

Adaptive Income declined 0.11% during February and is up 0.41% YTD. It was invested in investment grade bonds during February.


The sharp rally off the Christmas Eve lows has continued pretty much non-stop through February although the pace has slowed.

As noted in this weekend's Market Monitor: "The S&P 500 weekly close-only chart has cleared both of the pivots in the decline and projects to 2880 minimum while the high-low chart projects to 2923. ... Cumulative Advancing Declining Volume has remained supportive of the rally and Credit Spreads have continued to narrow which is supportive of “risk on” and continuation of the rally. So too is the collapse in equity volatilities."

Although my market work has absolutely no bearing on TAAS mechanical strategy selections and allocations, my current view is that the S&P 500 is very likely to visit 3,000 and, quite possibly, the long standing target at 3047. This is a Fed driven market, not a rational market.

Outlook and Strategy

I am revisiting the "7 Year Asset Class Real Return Forecast from GMO" which I showed last month. GMO updates this monthly but some recent comments on GMO's forecast make the topic worth revisiting.

Fortunately, the Global Adaptive fund basket offers broad international exposure.

Steve Blumenthal of GMG Capital Management offers the following comments on the GMO graph:

While the near term firmness suggests an outcome similar to Paths 2 or 3, my long view is that even the relatively modest decline shown in Steve's table, when coupled with rising government deficits, under-funded pensions, and extreme high levels (and poor quality) of corporate debt, will lead to a far deeper and more serious decline in the markets.

Hostile Condition

The Market Conditions Model remained in "Balanced" condition for a record long period of 31 months due to irregular trends and extreme valuations. "Balanced" is a transition between Favorable and Hostile in both directions.

The Market Condition switched to Hostile at the end of January. The Hostile funds basket seeks returns with an increased level of safety. Equity exposure is focused on big cap value and international real estate while fixed income exposure includes a much broader range of longer duration Treasuries and investment grade bonds. It also includes exposure to precious metals and commodities which can be counter-cyclical. As always, the Tactical Model selects the basket's best performing assets each month.

We are faced with two possible outcomes here.

  • A Correction followed by a return to Balanced conditions where the uptrend resumes still under extreme valuations.
  • A deeper Bear Market which leads to Favorable conditions after washing out market excesses. The deeper Bear Market would be preferable for two reasons. First it will provide trending conditions which will allow the Tactical Model to maximize returns during the decline. Second, it will setup "risk on" conditions which can produce mouth watering returns.

The Hostile Correction scenario last occurred Sep '15 through Jun '16 (CAGR of 9.9%) and was followed by resumption of the bull market under Balanced conditions and 10.8% CAGR for the strategy. A Hostile Bear Market last occurred Dec '07 through Jun '09 and was followed by 26 months of Favorable conditions and a 29%+ CAGR for the strategy. Clearly, our greatest reward lies in a major decline followed by a new bull market.

Subscriber Portal

The Market Monitor page in the Subscriber Portal 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. I highly recommend checking this page on a weekly basis. While this information has no bearing on the Global Adaptive Strategy, this is where you will see signs of shifts in market conditions which may provide more informed perspective than what is generally available.

Earl Adamy