Tactical Asset Allocation – July 2023

Tactical Adaptive Strategies Update


Strategy: Adaptive Global finished the month with a gain of 0.52% and a YTD gain of 4.43%.  Adaptive Global is our most broadly diversified “go anywhere” strategy with a 22+ year CAGR of 14.2%, a very modest maximum monthly drawdown of 7.7%, and a low 9.4% standard deviation of monthly returns.

Benchmark: The S&P 500 finished with a gain of 3.27% for the month and a YTD gain of 20.62%. It has a 22+ year CAGR of 6.9%, maximum monthly drawdown of 50.8%, and monthly standard deviation of 15.3%.

Strategy: Adaptive Income finished the month with a gain of 0.62% and shows a YTD gain of 1.69%. With a 22+ year CAGR of 9.1%, 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 0.02% and a YTD gain of 2.24%. It has a 22+ year CAGR of 3.7%, maximum monthly drawdown of 17.1%, and monthly standard deviation of 4.2%.

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


The Incredible Bull?

Recency bias is a terrible disease to which all too many investors succumb. Fortunately, you have me to pester you with the term “full market cycle”.

Old hands who have been subscribers since I started publishing the TAAStrategies in early 2016 (thank you!) have been through several; however newer subscribers may wonder if they are still on board the right ship. Let’s have a look.

The previous bull market peaked in December 2021 and the bear market which followed marked its monthly closing low in September 2022. The current bull market started in October 2022 and has risen sharply into this July.

The TAAStrategies performed remarkably well during the bear market with a 3.2% monthly drawdown in Adaptive Global versus a 23.9% drawdown for the S&P 500 and a 3.1% monthly drawdown in Adaptive Income versus a 15.5% drawdown for the iShares Core US Bond Fund.

However the TAAStrategies have lagged during this bull. The S&P 500 has advanced 29.5% from October 2022 through July 2023 while Adaptive Global has advanced just 5.2%. The iShares Core US Bond Fund advanced 3.7% from October 2022 through July 2023 while Adaptive Income has advanced just 2.3%.

However, the full (to date) market cycle from the December 2021 high paints a more complete picture. The S&P 500 shows a Compound Annual Growth Rate (CAGR) of (0.8%) while Adaptive Global shows a CAGR of 3.8%. The iShares Core US Bond Fund shows a CAGR of (7.1%) while Adaptive Income shows a CAGR of  (0.4%).

The Performance According To Economic Condition table below (and on the Insights page) now includes CAGR and Maximum Drawdown statistics for each of the past 4 market cycles. Have a look!

I have no crystal ball which informs me of the end date for this bull market but I suspect there is a bit left before it ends. When all is said and done, I expect that the TAAStrategies will once again finish the full market cycle ahead of the benchmarks in full market cycle return. And the cherry on top is not having to deal with those huge bear market drawdowns.

What Do Our Models See?

Market Conditions Model: The Market Conditions Model shifted from Hostile to Balanced at the end of April. The Model remains in Balanced condition for the rebalance at the end of July.

Tactical Model: The Tactical Model calculates TrendScores for both short and intermediate trends for all 27 of the funds we use. The current environment shows most equities in positive trends, high quality fixed income in negative trends, and high yield income in positive trends.

Subscription Change (reminder)

We are shifting from one-time annual subscriptions to recurring quarterly. While this entails some additional effort and costs, we trust that subscribers will find it a bit easier on the wallet. As your annual subscription comes up for renewal, you will receive the usual email reminder with a link to the quarterly subscription renewal. Where necessary, expiration dates are extended to compensate for any overlap in end and begin dates.

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 28th Market Monitor

All of the major indexes rose this week led by two of our canaries, Housing and Banking, along with the Nasdaq 100.. The large cap market leaders are bullish with bearish divergences on both the intermediate and short term basis’ and now target a return to the previous all time highs (SPX 4819). The bearish divergences suggest a correction will occur prior to significant further advances. The correction should be longer and/or deeper than any we have experienced during the past 6 months. The mid and small cap indexes have been playing catchup but are likely to participate in any correction.

Cumulative Advancing Declining Volume weakened a bit this week on both the short and intermediate term basis’. 1 more sector joined the bullish camp for a total of 9 out of 12. The energy sector is showing strong bullish divergences to price and Transports are notable for a shift to bearish divergence to price.

The Credit Markets Index rose again this week to a very bullish 47%. Particularly notable is the decline in spreads for both high yield and junk (CCC and below). The current loose credit conditions run counter to the Fed’s stated intent to tighten conditions to slow both the economy and inflation. The Credit Markets Index says that the Fed speaks with a forked tongue. Credit conditions are favorable for equity markets although reports suggest conditions are less favorable for local businesses.

The 10 year Treasury closed the week at 3.97%. Following a retest of the upper trendline of the bull flag I have been watching, we have confirmation of the breakout above the. The mid and long term ETFs show significant distribution in direct opposition to the drop in yield. The next target is the previous high at 4.33% which should provide some resistance. The next target above 4.33% is 4.62%.

Across other metrics

  • The ValueLine Weekly and Daily models remain on a buy signal
  • Our primary VIX Model continues bullish while the secondary VIX Model is showing bearish divergences. The unprecedented volumes now trading in one day options does raise questions regarding the reliability of VIX based signals (risk on)
  • The Short Term Breadth Model is negative for both issues and volume (risk off)
  • Consumer Discretionary continues to be preferred over Staples which are being ignored (risk on)
  • The growth/value ratio is favoring growth in small caps and value in big caps (risk on)
  • The Speculation Index is rising (risk on)
  • Among big tech market leaders, 3 are bullish, 3 are bearish, and 1 is neutral (risk off tech mega caps)
  • Inflation expectations are rising (risk off)
  • The 10 year/3 month Treasury spread rose a bit to 1.28% this week which is a historically negative level indicating  severe risk of recession.
  • Treasury ETFs continue to show signs of distribution

The bull market has broadened and shows few signs of weakness. My previous SPX target of 4550 has been met. The SPX now targets a return to the all time high at 4819. Momentum conditions are now extremely overbought with bearish divergences in both the intermediate and short terms which suggests a longer and/or deeper correction before pushing higher.

Credit Markets often provide the first clue of rising trouble for equities; however the Credit Markets Index says global credit conditions are loose and just about perfect. This appears to be fundamentally improbable in the face of aggressive rate hikes from OECD Central Banks. The typical end of hiking cycle has long rates falling ahead of short rates; however I believe there is a distinct possibility in this cycle that short rates will decline ahead of long rates.

Both equity and credit markets appear to be driven by behavioral economics (psychology) rather than fundamentals. The US appears to have entered a period of fiscal dominance which is proving more powerful than monetary policy. The challenge going forward is that the Federal borrowings will crowd private borrowers out of the credit markets. This should prove interesting during the balance of 2023.


Thank you for reading.

Earl Adamy

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