Tactical Asset Allocation – January 2024

Tactical Adaptive Strategies Update

Performance

Strategy: Adaptive Global finished the month with a gain of 0.27% and a gain of 0.27% YTD.  Adaptive Global is our most broadly diversified “go anywhere” strategy with a 24 year CAGR of 13.7%, a low maximum monthly drawdown of 7.7%, and a low 9.3% standard deviation of monthly returns.

Benchmarks: Adaptive Global is a broad strategy that invests in global equities and averages a 36% position in fixed income.

  • The Vanguard World Stock Fund (VT) finished the month unchanged and unchanged YTD. It has a 24 year CAGR of 8.8%, maximum monthly drawdown of 49.2%, and monthly standard deviation of 18.2%.
  • The Vanguard Balanced Index Fund (VBINX) finished the month with a gain of 0.61% and a gain of 0.61% YTD. It has a 24 year CAGR of 6.1%, maximum monthly drawdown of 32.6%, and monthly standard deviation of 9.8%.

Strategy: Adaptive Income finished the month with a gain of 0.37%% and a gain of 0.37% YTD. With a 24 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 0.15% and a loss of 0.15% YTD. It has a 24 year CAGR of 3.8%, maximum monthly drawdown of 17.1%, and monthly standard deviation of 4.4%.

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

Perspective

Act II?

The thing about generational memory is that it eventually dies out, usually just when most needed.

I’m not old enough to have experienced the Roaring Twenties of the twentieth century; however, I've been trading and investing in the futures, equity, and fixed income markets since the end of the secular bear and beginning of the secular bull in the early 1980’s. This market feels like it could be the Roaring Twenties of the twenty-first century. In any event, it shares many characteristics with the late 1990s, the most notable of which is the leadership and concentration in a handful of tech stocks which preceded an 85%+- decline in the Nasdaq 100.

How much higher can this rally go? Possibly higher than many optimists expect but not forever. The unfortunate aspect of blow-offs is the aftermath. I maintain 200+ charts of stock and fixed income indexes plus another 70+ charts on FRED. I see many signs of irrational exuberance (a phrase coined by Alan Greenspan 3 years ahead of the 2000 top); however I have yet to see compelling signs of a market top.

Asia

When viewed on a global basis, valuations in Asia stand out as relatively favorable. One disappointment is our allocation to Vanguard’s Asia Pacific ETF which is dominated by Japan. Japan, Australia, South Korea, Hong Kong, Singapore, and New Zealand. China has been cratering; however there is no China in VPL. VPL should be giving us some diversification into improved valuations. Maybe valuations don’t matter anymore.

Full Cycles

Our website is chock full of performance charts and tables; however the two most valuable charts cover our returns and drawdowns across four market cycles. They should not be missed:

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 January 26th Market Monitor

All major indexes except Housing advanced this week led by Banking, Broker Dealer and small cap indexes. The Nasdaq 100 advanced the least. Indexes remain bullish and overbought in the intermediate term and bullish and overbought in the short term. The Nasdaq 100 shows a short term bearish divergence to price. The major indexes average 3.8% below their targets with the S&P 500 closest at 0.45% and the small caps furthest at 8%.

Cumulative Advancing Declining Volume improved this week in both short and intermediate term. Strength in Advancing volume is limited to the mega caps: S&P 100, S&P 500 and Nasdaq 100 which show CADV confirmation of price. Just 3 of 12 sectors (Info Tech, Transports, and Cons Staples) are confirming price.

All 5 Market Breadth Ratios (SPX equal weight vs cap Weight , S&P 500 vs S&P 100, Ru2000 vs S&P 500, Nasdaq Comp vs Nasdaq 100, Nasdaq 100 equal weight vs cap weight) are showing negative breadth in favor of mega cap indexes and away from the broader indexes.

Valuations are extremely stretched with Market Cap at 176% of GDP even with the recent upward adjustment in GDP. While valuations provide no measure of timing, they do provide a measure of risk. MC/GDP was 134% at the 2000 high. In short, valuation risk is very high.

The Daily ValueLine Model issued a Sell signal last week; however it has yet to be confirmed by the more reliable Weekly ValueLine Model which continues to lag the big cap indexes.

The Credit Market Index fell back to 37% from 43% on the back of flattening yields. The Credit Market Index is showing signs of some tightening in US and European financial conditions. It is also declining even as equity markets continue to rally which marks a significant difference from typical behavior. The Index will get a push upward if yields begin to retreat.

The 10 year Treasury ticked up 1 basis point to 4.16% and is moving sideways in a tight range between 4.0% and 4.25%. Major support lies at 3.25% and major overhead resistance at 5.0%. Following such a sharp decline we should expect a rise in yield followed by a new trading range for which we have no targets as yet. Upward pressure on bond yields is most likely to come from Treasury issuance.

Across other metrics

  • One VIX Model remains on a buy signal while the second has shifted to sell (neutral)
  • The Short Term Breadth Model is failing to confirm the later stages of this rally (risk off)
  • My new Offense Defense Indicator has shifted to offense (risk on)
  • The growth/value ratios have shifted back from value to growth  (risk on)
  • The Speculation Index is falling (risk off)
  • Big 8 “tech” stocks: 4 are bearish, 4 are bullish (neutral)
  • Inflation expectations are rising (risk off)
  • The 10 year/3 month Treasury spread remains wide at  -1.04% and above its -1.63% low.
  • Industrial metals are flattening, petroleum is rising, and precious metals are falling
  • The US Dollar has broken weekly trendline support, but is oversold and attempting a rally

Generally, any index with a heavy weight in technology is moving up while others lag on a relative basis. The S&P 500 is 21 points (4.5%+-) below its typical target at 4912 while the mega cap S&P 100 and Nasdaq 100 indexes are 2% below their extended targets. Overall, it appears likely that the rally will take a rest when these targets have been met. While the big cap indexes are extremely overbought, there is little to suggest that the rally is in immediate danger of a major decline. The small and mid caps are well below their targets and not seeing much traction although the rally could get fresh legs if the market rotates into smid while the big caps rest.

I have been warning of the shift from monetary dominance to fiscal dominance for 4 months now. I believe firm evidence is visible across the markets:

  • While Treasury yields have pulled back from their highs, it remains to be seen if this is sustainable in the face of large Treasury issuance
  • The Treasury MOVE index flirted with the 130 level before pulling back to 110+-. It remains remains elevated (above 90) and periodically shoots higher
  • Treasury auctions at the long end of the curve are seeing buyer pushback which is forcing the Treasury to concentrate issuance at the short end of the curve..
  • The price of gold shot 10% from 1824 to a record high just shy of 2100 in just a few week and appears to be nearing a major breakout

While war is always a concern, I believe these shifts have more to do with the growing realization that the growing deficits and rising interest expense represent a threat to both the Treasury and equity markets.

Thank you for reading.

Earl Adamy

Ready to subscribe to the TAAStrategies?

"I believe in my experience, methods, and approach strongly enough that if you aren't entirely happy within the first two months, I'll return the entire Subscription Fee."

Prefer to learn more about the TAAStrategies?

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