Tactical Asset Allocation – January 2018

Tactical Asset Allocation Strategy Update

Performance

Global Core is up 1.88% for January and 2018 to date.

Going into the final weekend of January, Global Core was up 3.32%; however the market took some back during the final three days of the month. Gains were led by Domestic Big Cap followed by Mid and Small cap. Treasures delivered a modest loss.

Market

"Rising bond yields. Full employment.  Fed tightening. Trade frictions. Weak dollar. Rising twin deficits, spurred by tax reform. Sound familiar? It should. This was 1987.  Start rebalancing." - Dave Rosenberg

There have been 8 major declines since 1929 for which I keep annotated charts detailing the topping process. This rally has blown through the price relationships on every one of those tops including 1987; however 1987 is the most similar. I'm not suggesting that there are not many similarities in the fundamentals but the technicals are off the charts. 

While I still see so no immediate signs of a major market correction, the entire feeling is akin to being in the Twilight Zone. I've been actively investing and trading equity, bond, and commodity markets since the mid-1980's and I've never seen anything quite like this. I know this is not going to end well but I'll be darned if I can see when.

The rise in yields, which sparked the pullback which began on January 29th, has likely run most of its course for now. I expect the 10 Year Treasury Yield, which closed the week at 2.85%, to consolidate around 2.9%-3.0%. That should give equities a breather. The current 3.85% decline in the S&P 500, while steep, has yet to exhibit signs that "the top" in equities is in.

Outlook

It is abundantly clear that we are in very late stages of this bull market and it is not uncommon for tactical strategies to lag a bit in late bull markets. However this is more than compensated for by reduced bear market drawdowns and early bull market out-performance.

I think it's quite likely we see a minimum 5%-10% pullback during the first quarter of 2018. From there we could see a rally which fails ("the top") or we could see a run to SPX 3000+. Whenever we get the top, I believe it is going to be viscous. That's about as far as my crystal ball takes me.

Bond investors (as a group) are generally smarter than equity investors so the degree to which the corporate and high yield markets are extended is rather surprising. DoubleLine (Gundlach) is out with charts showing both corporate and high yield are two standard deviations above trend when compared to Treasuries ... the first time in over 30 years.

My crystal ball in fixed income is a bit clearer. I very strongly believe that the next market triggering event is going to come from the credit markets which is why I spend so much time monitoring them. My general outlook is that Treasury rates will rise gradually until the markets blink. We'll know that the markets are blinking because the 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 inflation and debt issues take center stage. That will be the next stage of the bear market in bonds which was confirmed by weekly and monthly closes above 2.6% in the 10 Year Treasury.

Global Core is perfectly capable of switching from Equities to Fixed Income (cash and/or Investment Grade Bonds and Treasuries) on a timely basis; however it is not going to "nail" the exact top in Equities.

Daily and Weekly Website Updates

The Proforma "Portfolio" page 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 Strategy (Conservative)

Month: 1.88% gain
Year-to-date: 1.88% gain
Full cycle-to-date (Sep 2007): 13.37% CAGR, 5.86% Max Monthly Drawdown

Global Strategy (Aggressive)

Month: 1.88% gain
Year-to-date: 1.88% gain
Full cycle-to-date (Sep 2007): 16.31% CAGR, 8.21% Max Monthly Drawdown

 

Tactical Asset Allocation Fund Basket Performance

Global Core

Month-to-date: 1.88% gain
Year-to-date: 1.88% gain
Full cycle-to-date (Sep 2007): 10.57% CAGR, 6.53% Max Monthly Drawdown

Global Satellite (includes Favorable & Hostile)

Month-to-date: hibernating since Jul 2016
Year-to-date: hibernating since Jul 2016
Full cycle-to-date (Sep 2007): 20.52% [email protected]*, 8.21% Max Monthly Drawdown

*CAGR for the Favorable and Hostile Market Conditions during which Global Satellite was invested

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