Tactical Asset Allocation – July 2021

Tactical Adaptive Strategies Update

Performance

Adaptive Global finished with a gain of 2.00% for the month and 17.07% Year To Date. The gain was led by our positions in big caps, especially growth and commodities.

Adaptive Income finished with a gain of 0.67% for the month and 8.21% YTD. Adaptive Income was invested entirely in high yield muni.

Adaptive Innovation finished with a loss of 2.92% for the month and loss of 2.66% YTD.

Perspective

The equity and bond markets appear to be struggling here as they attempt to juggle a cornucopia of issues. I have no crystal ball which will foretell the outcome; however I note that our equity strategies are reducing and hedging risk exposure.

I’ve been involved with Tactical Asset Allocation for a decade now. It was the demonstrated long-term historical value in reducing risk and improving returns that drew me to TAA at a time when I wanted to begin off-loading some of my portfolio management responsibilities.

No investment strategy can hope to anticipate and catch the tops and bottoms of major and minor market cycles. TAA provides a tested, mechanical methodology to lower risk and improve returns. The historical returns and drawdowns of the TAAStrategies outperform every competitive TAA strategy I have examined or used. Our strategies go far beyond ordinary TAA in identifying market conditions, recognizing high probability trend changes, and managing volatility.

I am confident that our strategies will successfully navigate the outcome.

Introducing A New Tactical Adaptive Strategy

The advent of Fed-endorsed rising inflation, whether transient or not, prompted me to begin working on a precious metals and bitcoin strategy using our Tactical Model. I wanted to capture a significant portion of the upside while limiting the downside risk. The resulting Adaptive Precious Metals and Bitcoin strategy, while more volatile than our other strategies, provides an excellent risk reward.

This strategy is for those who are concerned about inflation and currency debasement or seeking a lower risk way to add another asset class to the portfolio.

The Adaptive Precious Metals & Bitcoin strategy is intended to provide investors with high returns from investment in precious metals and bitcoin with significantly reduced volatility. The TAAStrategies Tactical Model uses our proprietary Adaptive Dynamic Momentum and Targeted Volatility algorithms to manage allocations across precious metals, bitcoin, and Treasuries.

Bitcoin is a relative newcomer to investable assets and I take no position as to whether bitcoin is or is not a sustainable asset class.

This strategy is intended to capitalize on trending moves in both precious metals and bitcoin while managing volatility to reduce risk.

The table (see strategy links below) shows back tested results for nearly 6 years including the 2020 bear market. Dividends are included. The table, produced by the Tactical Model, shows month by month and annual returns together with summary statistics.

Market

From the July 30th Market Monitor

The major indexes were mixed this week with large caps down a bit. The mid and small cap, broker dealer, banking, and housing indexes rose. The big cap indexes have yet to correct and are showing bullish trends with bearish divergences on both intermediate and short term basis. This favors a correction.

Breadth, as measured by ratios of several narrow big cap indexes to several broad all cap indexes remains negative. Cumulative Advancing Declining Volume improved this week but remains bearish or weak on all sector charts except Utilities.

The Credit Market Index declined again this week to a negative -27%. While domestic spreads have risen slightly, Emerging Market spreads are rising sharply. This needs to be watched carefully for signs of contagion to domestic and European credit markets and to equity markets.

The most recent low in the 10 year Treasury was 0.54% in July of 2020 and the most recent high was a sharp rise to 1.73% in March of 2021. A normal 38% correction is 1.28%. The yield ticked down to 1.18% this week but closed at 1.24%. Given the sharp moves up and down, the longer term trend is unclear. Investors appear to be wary of buying into the rise in price (decline in yields).

The current list of caution flags remains large:

  • The Speculation Index continues to trend down.
  • The Russell 2000 has failed 6 attempts to break out of a 6 month consolidation. While it rejected the recent low, the ETF remains under distribution.
  • Big cap growth has taken over the leadership from value
  • Breadth continues to narrow
  • The S&P 500 shows 8 Distribution Days (0.2% decline on higher volume) in the past 30 trading days with 0 Accumulation Days (1% rally on higher volume)
  • I maintain a chart page with the Big Seven: 4 are trending up, 3 are weak
  • The ValueLine Weekly model failed to trigger a Buy signal on the new high in the SPX
  • The VIX has failed to confirm the new highs in the SPX
  • The Credit Market Index continues its negative drift

Recent comments bear repeating: “Assembling the jigsaw puzzle, I am seeing more and more warning signs that a top of some kind is drawing close. What market actions would ease my concerns? A new high in the Russell 2000. Increased volume on up days. A buy signal from the Value Line Weekly model. Improved breadth.” Nothing has changed, however the decline has not been steep enough to provide any downside targets.

Thank you for reading.

Earl Adamy

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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)

This strategy is intended to capitalize on trending moves in both precious metals and bitcoin if and when they occur while managing volatility to reduce risk. The strategy, which uses a basket of precious metals, bitcoin, and Treasury funds, selects the single best fund each month although it provides blended allocations when necessary to manage volatility.

Bitcoin is a relative newcomer to investable assets and we take no position as to whether bitcoin is or is not a sustainable asset class. The Grayscale Bitcoin Trust used in this strategy was not established until 2015 so our history is limited. There are no predecessor funds which are similar enough to use for infill.

The CAGR in 2017 is extraordinary; however the bitcoin trust rose 1893% from $1.17 to $22.15 during this period. While the strategy remained invested in bitcoin for 10 of the 12 months, volatility weighting significantly reduced the weighting to bitcoin from a low of 14.6% to a high of 68.0%. The use of Treasuries to manage bitcoin volatility accounts for the high percentage invested in fixed income assets.

Volatility weighting has little effect on precious metals which typically receive a 100% weight when selected.