Tactical Asset Allocation – January 2022

Tactical Adaptive Strategies Update


Adaptive Global finished with a loss of 1.52% for the month. The strategy spent the month invested in domestic big caps, commodities, and cash. Adaptive Global is our most broadly diversified “go anywhere” strategy with a 20+ year CAGR of 14.8%, a very modest maximum drawdown of 7.7%, and a low 9.4% standard deviation of monthly returns.

Adaptive Income finished with a loss of 0.28%. It was invested in Senior Loans. With a 20+ year CAGR of 9.7%, this strategy captures $6+ dollars of gain for every $1 in loss. It sports our lowest maximum drawdown of 3.9% and our lowest volatility with a standard deviation of just 4.3%.

Adaptive Innovation finished with a loss of 1.96%. Adaptive Innovation was invested a combination of Treasuries and cash. This is a niche strategy intended to be used for a very small portion of a diversified portfolio. It sports a 6 year CAGR of 20.4%, maximum drawdown of 19.7%, and standard deviation of 17.3%.

See the strategy descriptions, charts, and tables below or on the Strategies page.


As goes January, so goes the year?

There is an old saying on Wall Street: “As goes January, so goes the year?”

Not our two TAAStrategies with 22 years of history.  Tactical Adaptive Global which had 7 negative Januaries with all 7 years ending with strong returns. So too for Tactical Adaptive Income which has had 5 negative Januaries with nary a down year.

This is quite likely due to the ability of our Tactical Model to often sense trouble before it actually happens. While this does not entirely eliminate losses, it does mitigate them. The S&P 500 closed January down 5.3%, but Adaptive Global is off just 1.5%. And while the ARK Innovation Fund is down 20%, Adaptive Innovation is down just 2.0%.

Ivy High Yield

I very much appreciate questions from my subscribers. Aside from providing an opportunity to communicate one on one, questions also provide insight into needed improvements and missed communication.

Although we ultimately passed on Ivy High Yield for Adaptive Income’s allocation for January, it brought forth a concern which has been expressed from time to time. Namely, brokers are charging an early exit fee if we fail to hold the fund for their minimum holding period. What follows is a note from our Broker Notes page.

Important Note for Adaptive Income Strategy:

Delaware Ivy High Yield is an Open End Mutual Fund and is the only OEF I employ in the strategies.

Why have I chosen to use Delaware Ivy High Yield when there are a number of high yield ETFs? Because WHIYX is unique in both performance and volatility management. Not only does Ivy High Yield account for 40%+- of full cycle strategy returns but the managers have long done an excellent job in minimizing volatility under turbulent market conditions.

Delaware Ivy High Yield is generally available in one of three fund classes:

  • WHIYX (Class Y)
  • IVHIX (Class R, formerly Class I)
  • WHIAX (Class A)

Each class has different trading restrictions and fees. Classes Y and R are generally the most investor friendly. If one class has trading restrictions, please check the others. Make certain you are not charged a load if using Class A.

Delaware Ivy imposes short term trading restrictions which limit the repurchase of the fund within 60 days of prior sale. The Tactical Model is designed to respect the 60 day restriction on re-entry following a sale. The Tactical Model is also designed to hold an existing position unless there is a significantly better alternative.

Brokers offering No Transaction Fee mutual fund trading often impose additional limits or restrictions as part of their NTF offerings. The most frequent broker surcharge for violating the minimum holding period is a $50 fee.

Minimum hold periods range from 0 days at Interactive Brokers to 60 - 90 days at most brokers to 180 days at TDA. As a point of interest, I once asked TDA if they would reduce the minimum hold to 60 days if I transferred our substantial TAAStrategies account to them and they declined. Now that Schwab has taken over TDA, the minimum may be reduced to Schwab's 90 days (check).

To apply some dollars and cents to the issue:

As of December 31, 2021 we have owned Ivy High Yield 47 times for 103 months over a period of 22 years:

  • 18 times for 1 month
  • 18 times for 2 months
  • 11 times for 3 to 10 months

For accounts at brokers applying a $50 fee for less than 3 months, the cost over 22 years comes to 36 x $50 = $1800 or $81.82 annually. That works out to 0.082% on a $100,000 account for which the 22 year CAGR has averaged 9.8%.

An irritation? Yes. A financial disincentive? The out-performance of the Ivy High Yield fund more than offsets surcharges in all but the smallest of positions.


From the January 28th Market Monitor

This week ended mixed following a sharp decline and rebound. Big caps, Banking, and Broker-Dealer indexes ended slightly positive while Small and Mid caps and Housing indexes declined. Mostl indexes have entered Correction territory (down 10%+).

The big cap indexes remain bullish and falling on an intermediate term basis and bearish and rising on a short term basis. The small and midcap and NASDAQ 100 indexes are bullish and oversold on an intermediate term basis and bearish and oversold on a short term basis. All of which suggests that the correction will continue and big caps may return to the highs. Downside targets for the S&P 500 are 4171-4133.

Cumulative Advancing Declining Volume is benchmarked to changes in price. While we are seeing strong distribution, the rate of distribution in volume generally lags the rate of decline in price across many indexes and sectors. We need to see a shift in the overall trend from distribution to accumulation to support a rally. Overall, we are seeing a rate of change suggestive of correction rather than an impulsive decline.

The Credit Markets Index declined again this week as yields on both investment grade and high yield corporate debt rose globally. The good news is that spreads on global investment grade and high yield corporate debt have risen gradually; however it would not take much for spreads to break out of their base. Spreads, especially on high yield, are generally an excellent canary for serious trouble in equities.

The 10 year Treasury closed at its highest level in 2 years this week at 1.78%. The past two weeks have seen highs of 1.86%-1.87% which are close to my long standing 1.9%-2.0% target. I expect another push higher from this week’s close; however I expect we’ll see a top in the 1.9%-2.05% range. A move above 2.05% would likely extend to 2.45% or possibly 2.9%.

The current watch list :

  • The Speculation Index has turned down as investors reduce risk
  • The Russell 2000 has now broken down from its long consolidation after its breakout rally failed..
  • Apple is the only remaining stock of the seven mega-cap market leaders which has not turned down.
  • The shift from growth to value has accelerated in both big and small caps.
  • Consumer Staples is much better bid than Discretionary which is risk off
  • Investor inflation expectations are flattening at relatively high levels
  • Overall market breadth is lagging the market with increased concentration among the mega caps
  • 80% of the S&P 500 stocks are below their 20 day moving average.
  • The VIX levels in the S&P 500 and NASDAQ 100 are confirming the decline while the Russell 2000 shows a bullish divergence.

Are we in for a bear market (down 20%)? While GDP/Market Cap has declined from 205% to 185%, valuations remain extreme by all historical standards and supportive of a bear market decline. However, the market is so far signaling that this decline is corrective (down 10%) rather than impulsive.

A much sharper decline will become probable should credit market spreads come under further stress. Credit is the lifeblood for everything from zombie corporations to speculation and when it becomes significantly less available or more expensive, equities typically decline sharply.

Thank you for reading.

Earl Adamy

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