Tactical Asset Allocation – July 2017

Tactical Asset Allocation Strategy Update

Performance

Global Core is up 1.35% MTD and up 7.35% YTD

Domestic US Big Cap did 80% of the lifting this month while our smaller positions in International, Emerging Markets, and Treasuries contributed the other 20%.

Market

Equity markets were up globally this month with International Developed and Emerging Markets out-performing the US. Strength in the US market has been highly concentrated in a handful of wildly popular "can't miss" stocks. Mid and Small Cap stocks lagged. The fixed income market moved sideways.

Upgraded Market Risk Model

This Bull Market is going to come to an end, sooner or later. It will die on its own excesses or on withdrawal of liquidity from Central Banks.

I have devoted considerable time and effort to researching the characteristics of Bear Markets with an eye to enhancing the Market Risk Model.

I created the Market Risk Model two years ago to identify favorable risk conditions under which our Global Satellite Strategy should be deployed to deliver high returns without incurring excessive risk. The efficacy of this approach is demonstrated by results which have delivered returns nearly double that of the Global Core Strategy during Favorable risk conditions which exist during roughly 50% of a full Market Cycle.

I am introducing an upgraded Market Risk Model which signals three risk conditions: Favorable, Balanced, and Hostile:

  • Favorable: strong market with little risk of major decline, suitable for Satellite Strategy
  • Balanced: risks of decline and opportunity for advance is roughly equal, suitable for Core Strategy (primarily equities)
  • Hostile: high risk of extended market decline and large drawdowns, suitable for Core Strategy (primarily fixed income)

Understand that we are measuring probabilities here, not certainty. Favorable does not come with a guarantee of a Bull Market nor does Hostile come with a guarantee of a Bear Market.

The upgraded Market Risk Model combined with the Core and Satellite Strategies have been very effective in far out-performing the S&P 500 during every market condition as well as over a full cycle.

I am in the process of writing a Featured Article covering the Market Risk Model complete with graphics showing historical and market condition segmented performance. I am also putting the finishing touches on a new Global Satellite (Hostile) Strategy which delivers significant additional full cycle performance.

Earl Adamy

Tactical Asset Allocation Strategy Performance

Global Strategy (Conservative)

Month: 1.35% gain
Year-to-date: 7.35% gain
Full cycle-to-date (Sep 2007): 13.21% CAGR, 6.53% Max Monthly Drawdown

Global Strategy (Aggressive)

Month: 1.35% gain
Year-to-date: 7.35% gain
Full cycle-to-date (Sep 2007): 16.61% CAGR, 8.22% Max Monthly Drawdown

Tactical Asset Allocation Fund Basket Performance

Global Core

Month-to-date: 1.35% gain
Year-to-date: 7.35% gain
Full cycle-to-date (Sep 2007): 10.24% CAGR, 6.53% Max Monthly Drawdown

Global Satellite

Month-to-date: hibernating since Nov 2014
Year-to-date: hibernating since Nov 2014
Full cycle-to-date (Sep 2007): 26.87% [email protected]*, 8.22% Max Monthly Drawdown

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

Ready to learn More about the Strategies?

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

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Compares performance of the Tactical Adaptive Strategies to the S&P 500 and Vanguard Balanced Index Fund

Supporting tables for Tactical Adaptive Global. S&P 500 (SPY) and Vanguard Balanced Index Fund (VBINX) can be found below

Our backtest results tables are constructed for two full market cycles beginning in January 2000.

The most recent market cycle covers October 2007 to date. The fund baskets for our tactical strategies are constructed from indexed Exchange Traded Funds (ETFs) with just two exceptions, an Open End Fund and a Closed End Fund, both with long history.

The earlier market cycle covers January 2000 through September 2007. A number of the ETFs we use were not created until later in the decade. For those cases, we infill using predecessor Open End Funds (OEFs) for which the indexing and/or subclass is substantially similar to the ETF. Aside from providing insight into possible strategy performance during a second, earlier, cycle, they also offer the advantage of completely out of sample data. The fact that the metrics of both cycles are very comparable appears to validate the process.

We have been asked if it is possible to extend backtests to earlier decades. While this appears to be a common practice with some services; it is not possible to produce credible results for many strategies due to the lack of funds with substantially similar indexing and/or subclass. Doing so would force me to stretch the term "substantial" far beyond my comfort level.

A Caveat

A 35+ year secular bull market in both equities and bonds began in 1982. The last cyclical bull market in equities (and to a lesser extent, bonds) began 10 years ago. Returns during these periods have been historically exceptional. Market returns for the next 10 years are highly unlikely to approach those of the past 10. In fact, there is at least some evidence that market returns have a high probability of being significantly lower and that bonds and equities (which have risen together) may actually begin working at cross purposes.

Investors should not use the statistics shown for our strategies to establish expectations of specific levels of returns or drawdowns. Investors should, however, appreciate that we believe the principles which underlie the Tactical Adaptive Global, Tactical Adaptive Income, and Tactical Adaptive Innovation Strategies are enduring enough to significantly outperform the market in the future, both in lowering risk and in improving returns.

Benchmark S&P 500 (SPY)

Benchmark Vanguard Balanced Index Fund (VBINX)

Compares performance of the Tactical Adaptive Strategies to the S&P 500 and Vanguard Balanced Index Fund

Supporting tables for Tactical Adaptive Income, S&P 500 (SPY) and Vanguard Balanced Index Fund (VBINX) can be found below

Our backtest results tables are constructed for two full market cycles beginning in January 2000.

The most recent market cycle covers October 2007 to date. The fund baskets for our tactical strategies are constructed from indexed Exchange Traded Funds (ETFs) with just two exceptions, an Open End Fund and a Closed End Fund, both with long history.

The earlier market cycle covers January 2000 through September 2007. A number of the ETFs we use were not created until later in the decade. For those cases, we infill using predecessor Open End Funds (OEFs) for which the indexing and/or subclass is substantially similar to the ETF. Aside from providing insight into possible strategy performance during a second, earlier, cycle, they also offer the advantage of completely out of sample data. The fact that the metrics of both cycles are very comparable appears to validate the process.

We have been asked if it is possible to extend backtests to earlier decades. While this appears to be a common practice with some services; it is not possible to produce credible results for many strategies due to the lack of funds with substantially similar indexing and/or subclass. Doing so would force me to stretch the term "substantial" far beyond my comfort level.

A Caveat

A 35+ year secular bull market in both equities and bonds began in 1982. The last cyclical bull market in equities (and to a lesser extent, bonds) began 10 years ago. Returns during these periods have been historically exceptional. Market returns for the next 10 years are highly unlikely to approach those of the past 10. In fact, there is at least some evidence that market returns have a high probability of being significantly lower and that bonds and equities (which have risen together) may actually begin working at cross purposes.

Investors should not use the statistics shown for our strategies to establish expectations of specific levels of returns or drawdowns. Investors should, however, appreciate that we believe the principles which underlie the Tactical Adaptive Global, Tactical Adaptive Income, and Tactical Adaptive Innovation Strategies are enduring enough to significantly outperform the market in the future, both in lowering risk and in improving returns.

Benchmark S&P 500 (SPY)

Benchmark Vanguard Balanced Index Fund (VBINX)

Compares performance of the Tactical Adaptive Strategies to the S&P 500 and Vanguard Balanced Index Fund

Supporting tables for Tactical Adaptive Innovation, S&P 500 (SPY) and Vanguard Balanced Index Fund (VBINX) can be found below

The Innovation ETFs used in the Innovation Strategy were not established until 2014-2015 so our history is limited. There are no predecessor funds which are similar enough to use for infill.

A Caveat

A 35+ year secular bull market in both equities and bonds began in 1982. The last cyclical bull market in equities (and to a lesser extent, bonds) began 10 years ago. Returns during these periods have been historically exceptional. Market returns for the next 10 years are highly unlikely to approach those of the past 10. In fact, there is at least some evidence that market returns have a high probability of being significantly lower and that bonds and equities (which have risen together) may actually begin working at cross purposes.

Investors should not use the statistics shown for our strategies to establish expectations of specific levels of returns or drawdowns. Investors should, however, appreciate that we believe the principles which underlie the Tactical Adaptive Global, Tactical Adaptive Income, and Tactical Adaptive Innovation Strategies are enduring enough to significantly outperform the market in the future, both in lowering risk and in improving returns.

Benchmark S&P 500 (SPY)

Benchmark Vanguard Balanced Index Fund (VBINX)