Tactical Adaptive Strategies Update
Adaptive Global finished the month with a loss of 6.17% and a YTD loss of 2.39%. Adaptive Global is our most broadly diversified “go anywhere” strategy with a 22+ year CAGR of 14.0%, a modest maximum monthly drawdown of 7.7%, and a low 9.4% standard deviation of monthly returns.
Adaptive Income finished the month with a loss of 1.28% and a YTD gain of 0.58%. With a 22+ year CAGR of 9.1%, this strategy captures $5 dollars of gain for every $1 in loss. Adaptive Income sports our lowest maximum monthly drawdown of 4.0% and our lowest volatility with a monthly standard deviation of just 4.3%.
The S&P 500 finished with a loss of 2.51% for the month and a YTD gain of 3.62%. It has a 22+ year CAGR of 6.3%, maximum monthly drawdown of 50.8%, and monthly standard deviation of 15.4%.
The Vanguard Total Bond Market Index Fund (entirely investment grade) finished the month with a loss of 2.77% and a YTD gain of 0.32%. It has a 22+ year CAGR of 3.8%, maximum monthly drawdown of 17.8%, and monthly standard deviation of 4.0%.
For details, see the links below to strategy descriptions, charts, and tables or the Insights page.
Adaptive Global, which targets intermediate term trends, has been severely whipsawed as the equity market headed north, then abruptly reversed course. All 4 allocations, each in a different sector, suffered the same fate. And, for a final insult, the S&P 500 outperformed Adaptive Global.
Has this happened before? Yes, in both 2006 and 2010 Adaptive Global had large monthly losses which exceeded the S&P 500, and in each case, Adaptive Global finished the year up and well ahead of the S&P 500. Will 2023 be a repeat? This can only be answered in the fullness of time.
Income has also been whipsawed but not as badly.
What will I do to “fix” the problem? There is nothing which can or should be “fixed”. It is the nature of the markets to fool us some of the time. The longer history suggests that both strategies will prevail.
What Do Our Models See?
Market Conditions Model: The remains Hostile although it shows some improvement from the September closing low. Equity momentum and credit market risk have improved modestly while valuations remain extended. Should the improvements persist, we could see a return to a Balanced condition in the near future. Should recent worsening conditions in both the equity and credit markets persist, we can hope for a washout which will permit a shift to Favorable conditions.
Tactical Model: The Tactical Model calculates TrendScores for both short and intermediate trends for 27 all of the funds we use. The current environment is marked by a relatively small number of positive trends and an absence of high confidence trends except for those which are negative.
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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 February 24th Market Monitor
The major indexes were down this week led by the Housing and Broker Dealer indexes and the Nasdaq 100. The intermediate trend is neutral and falling while the short term trend is bullish and oversold. This combination is likely to produce a rally next week, the duration of which is uncertain.
The S&P has broken trendline support; however it is the only major index to do so. All major indexes continue to have targets above current price with the S&P 500 target at 4306; however the likelihood of reaching upside targets has diminished considerably.
A major negative is the Sell signal from the ValueLine Weekly Model which has joined the Sell signals in both VIX models. Signals from the ValueLine Weekly Model are generally good for 1 - 3 months.
Cumulative Advancing Declining Volume in the S&P indexes remains surprisingly constructive given last week’s decline in prices. However, CADV in the sectors is deteriorating and I am unsure of what to make of the divergence.
The Credit Markets Index declined again this week to a still bullish 37% indicating credit conditions remain accommodative. A big surprise decline from the Fed’s quarterly “Asset Quality Measures, Delinquencies on All Loans and Leases, Commercial and Industrial, All Commercial Banks”.
The 10 year Treasury moved up this week to 3.95% retracing ⅔ of the decline from the October high at 4.21%. A long standing target based on 4 years of weekly history, is at 4.88%. The recent retracement has provided 3 new targets: 4.39%, 4.64%, and 4.92%. While a bit of a stretch, I am always alert when I see conflued of 2 or more targets, in this case 4.88% and 4.92%. The fresh high at 4.39% is highly probable.
Across other metrics:
- The switch from consumer staples to discretionary may be flagging (risk off)
- The growth/value ratio is flattening but growth has yet to get a firm bid (risk off)
- The Speculation Index is also flagging (risk off)
- 4 of 7 former big tech market leaders are showing distribution (risk off)
- Inflation expectations moved higher for the second week in a row (risk off)
- The 10 year/3 month Treasury spread remains at a negative -0.75%. proximate to a 20+ year record low of -1.0%+- indicating severe risk of recession
Last week I wrote: “Overall, the equity market is acting and trending bullish (in spite of the recent minor correction) while the credit market is showing concern over the future path of interest rates. The upside/downside equity risk appears to have shifted from bullish (SPX 4230) to neutral/bearish (4000).”
The SPX closed the week at 3970 and appears to have found some support from which it is likely to attempt a rally. The price structure and modest deterioration in some internals suggests that prices are unlikely to advance high enough to meet upside targets which could turn the rally into a bull market. With respect to further downside, we are simply not seeing the kind of deterioration in Cumulative Advancing Declining Volume and credit metrics which are supportive of a further decline. For the time being, this suggests a trading range between 3900 and 4200.
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Exceptional results are due entirely to the complementary strengths of our Market Conditions Model and our Tactical Model.