Tactical Asset Allocation – July 2022

Tactical Adaptive Strategies Update

Adaptive Global spent the month in cash and shows a gain of 0.15% YTD.  Adaptive Global is our most broadly diversified “go anywhere” strategy with a 22+ year CAGR of 14.5%, a modest maximum drawdown of 7.7%, and a low 9.3% standard deviation of monthly returns.

Adaptive Income spent the month in cash and shows a loss of 2.10% YTD. With a 22+ year CAGR of 9.4%, this strategy captures nearly $6+ dollars of gain for every $1 in loss. Adaptive Income sports our lowest maximum drawdown of 3.9% and our lowest volatility with a standard deviation of just 4.3%.

Adaptive Innovation has been in cash since March 1 and shows a loss of 2.76% YTD. This is a niche strategy intended to be used for a very small portion of a diversified portfolio. Adaptive Innovation sports a 6 year CAGR of 18.6%, maximum drawdown of 20.3%, and standard deviation of 16.7%.

The S&P 500 finished with a gain of 9.21% for the month and a loss of 12.62% YTD. It has a 22+ year CAGR of 6.6%, maximum drawdown of 50.8%, and standard deviation of 15.2%.

The Vanguard Total Bond Market Index Fund finished the month with a gain of 2.12% and shows a loss of 8.56% YTD. It has a 22+ year CAGR of 4.1%, maximum drawdown of 12.6%, and standard deviation of 3.7%.

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

Perspective

Market

We spent nearly all of July in the United Kingdom and Ireland without the usual laptop. The hiatus from the market was refreshing. On returning, I had two primary tasks: use the Market Condition and Tactical Models to update allocations for August and update the Market Analysis from the previous version written on July 1.

The Market Condition model indicates that the equity market trend remains strongly negative. Financial conditions have improved from extremely hostile, but remain negative.

Adaptive Global uses a broad basket of domestic and international equities, fixed income, real estate, commodities and precious metals. The Tactical Model shows negative trends with high confidence for all funds except for one which invests in Treasury Bills.

The message from both Models is that the equity and fixed income markets remain challenging in spite of the recent rally in both.

The Market Analysis shows that Intermediate term downside risks remain elevated and will remain so as long as the Fed continues to aggressively raise short term rates.

The TAAStrategies have missed most of the mayhem on the downside so I don’t begrudge missing a bit of upside, especially if this turns out to be a bear market rally.

Performance According To Market Condition

The comparative table which appeared in the most recent Featured Article on the blog has been updated to reflect the shift from bull market to bear market triggered in mid-June. In addition to the blog article, it appears in the third pane on the home page.

Market Condition

The Market Conditions Model which shifted to Hostile for the month of May, remains Hostile. Our whitepaper “What Is A Market Conditions Model? How Does It Lower Risk?” provides a succinct summary of what this means for investors.

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 July 29th Market Monitor

All major indexes rose for the week led by mid caps, small caps, and the broker dealer index. Notably, the Housing Index is getting a bid. The intermediate downside target for the SPX remains in place but is close to reversing. While intermediate term trends remain bearish, the short term trends have shifted from bearish to neutral although overbought. The short term target is 4323 with a decent probability of being met. The Volatility Indexes are confirming the rally.

Cumulative Advancing Declining Volume included a breadth thrust signal mid-month and has been confirming the rally; however it is beginning to show some relative weakness. A few sectors are extremely overbought.

The Credit Markets Index has improved significantly over the past month; however it is not out of danger. We have seen some pullback in global yields accompanied by narrower risk spreads which has supported the equity rally. However, yields remain high and the direction of spreads has not reversed on an intermediate term.

The 10 year Treasury has pulled back sharply and appears headed for a test of 2.47% which includes a major long term trend line.

Positive shifts are observed in the Speculation Index, Growth versus Value, and Discretionary versus Staples.

On July 1st I wrote that “Conditions continue to favor a multi-week move higher followed by a lower low.” and the SPX has since rallied 9%. Current conditions favor a near term correction followed by a move higher, perhaps to the SPX 4323 target. Intermediate term downside risks remain elevated and will remain so as long as the Fed continues to aggressively raise short term rates.

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 results tables are constructed for three full market cycles beginning in January 2000.

The Adaptive Global table shows backtested results through July 2018 followed by actual results. More information is available in the blog article: The TAAStrategies, A Short History.

The most recent market cycle covers January 2020 to date.

The second market cycle covers October 2007 through December 2019. The Adaptive Global and Adaptive Income strategies were developed using the first 10+- years of data from this cycle while the final years are actual.

The third market cycle covers January 2000 through September 2007. This market cycle was used to provide out of sample validation of strategy results from the second market cycle. The fact that the return and risk metrics for the third cycle are statistically comparable to those for the second cycle validates the process.

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. A number of the ETFs we use were not created until 2007+. In each case, we infill using predecessor Open End Funds (OEFs) for which the indexing and/or subclass is substantially similar to the ETF.

We have been asked if it is possible to extend backtests to the 1970’s. While a few publishers attempt this; we believe it is not possible to produce credible results for all but the most basic TAA strategies due to the lack of funds with substantially similar indexing and/or classification. Doing so would force me to stretch the term "substantial" far beyond my comfort level.

A blank month indicates that the strategy was in cash.

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 results tables are constructed for three full market cycles beginning in January 2000.

The Adaptive Income table shows backtested results through June 2019 followed by actual results. More information is available in the blog article: The TAAStrategies, A Short History.

The most recent market cycle covers January 2020 to date.

The second market cycle covers October 2007 through December 2019. The Adaptive Global and Adaptive Income strategies were developed using the first 10+- years of data from this cycle while the final years are actual.

The third market cycle covers January 2000 through September 2007. This market cycle was used to provide out of sample validation of strategy results from the second market cycle. The fact that the return and risk metrics for the third cycle are statistically comparable to those for the second cycle validates the process.

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. A number of the ETFs we use were not created until 2007+. In each case, we infill using predecessor Open End Funds (OEFs) for which the indexing and/or subclass is substantially similar to the ETF.

We have been asked if it is possible to extend backtests to the 1970’s. While a few publishers attempt this; we believe it is not possible to produce credible results for all but the most basic TAA strategies due to the lack of funds with substantially similar indexing and/or classification. Doing so would force me to stretch the term "substantial" far beyond my comfort level.

A blank month indicates that the strategy was in cash.

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.

The Adaptive Innovation table shows backtested results through June 2019 followed by actual results. More information is available in the blog article: The TAAStrategies, A Short History.

A blank month indicates that the strategy was in cash.

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)