Tactical Asset Allocation – July 2019

Tactical Adaptive Strategies Update


Adaptive Global gained 0.50% and 1.79% YTD.

Adaptive Income gained 0.42% and 2.45% YTD.

Adaptive Innovation gained 0.38% and 8.37% YTD

Both Adaptive Global and Adaptive Innovation entered July weighted toward Treasuries while Adaptive Income held high yield. All had modest but firm gains for July but weakened into the July 31 close following the less dovish than expected Federal Reserve announcement of a 25 basis point rate cut with no promise of further cuts.


A Third Strategy

It's been a busy few months for strategy development. I released a much improved Adaptive Income Strategy in June and put the finishing touches on our new Adaptive Innovation Strategy in July. I have no plans for additional strategies as I believe Tactical Adaptive Global, Tactical Adaptive Income, and Tactical Adaptive Innovation provide a full range of tactical opportunities.

If you've ever been tempted to dip your investment toe into the leading edges of innovation but were put off but the high volatility; Tactical Adaptive Innovation may just fit the bill for a "big toe" portion of your portfolio. Businesses of interest include big data and analytics, nano technology, genetics, medicine and biotechnology, networks, energy and environment, robotics, 3-D printing, bioinformatics, and financial services.

A new Tactical Adaptive Innovation Strategy whitepaper whitepaper has been posted under Insights.

We now have in place a suite of three very diversified tactical strategies:

  • Tactical Adaptive Global provides subscribers with broad exposure to domestic and international equities, fixed income, commodities and precious metals. It is intended for use as the primary strategy in a tactical asset allocation portfolio.
  • Tactical Adaptive Income provides subscribers with a Fixed Income strategy which delivers outstanding results coupled with low drawdowns.
  • Tactical Adaptive Innovation fills a niche for those of us who are conservative investors but would like to participate in the leading growth sectors of our economy ... without the usual degree of risk. Note that Adaptive Innovation switches to Treasuries under Hostile market conditions.

Other than "safe haven" Treasuries, there is no overlap in the three strategies.

Updates for the three strategies are now shown on the tabbed Tactical Adaptive Strategies page in the Subscriber portal as well as on the Strategies page.

Updates to Insights

The website Insights page has been updated with new whitepapers. There are now three Strategy whitepapers

All other whitepapers have been reviewed and updated where necessary.

Personal Portfolio Changes

The TAAS portion of our investment portfolio is currently 45%+-. I am reallocating the TAAS portion to take advantage of improved strategy diversification opportunities. Adaptive Global will continue to be our core holding at 65% of our TAAS allocation. The remaining 35% will be a blend of 75% Adaptive Income and 25% Adaptive Innovation.

For the period October 2015 through June 2019, blending a 75% allocation to Adaptive Income (8.5% CAGR and 2.8% MaxMD) with a 25% allocation to Adaptive Innovation (31.3% CAGR and 12.2% MaxMD) would have worked out to a blended CAGR of 14.2%+- and MaxMD of 5.2%.

The allocations will look like this

  • 65% Adaptive Global
  • 26.25% Adaptive Income
  • 8.75% Adaptive Innovation

Upgraded Portfolio Manager and Rebalance Calculator

The Portfolio Manager (v6.10)  has been upgraded to include the new Adaptive Innovation Strategy as well performance information comparable to that shown for the Strategies in the Subscriber Portal.


From the July 26th Market Monitor

All major indexes were up nicely this week lead by the Banking Index. The Banking Index has been trailing and further Fed rate cuts are likely to reduce banking margins so go figure. Virtually all are showing bearish divergences on both weekly and daily charts which suggests high probability of a decline.

Bearish divergences continue between the big cap S&P 500, S&P 100, and NASDAQ 100 all of which are making new all-time-highs and the rest of the universe including medium and small cap stocks, banking (even though it had a great week), broker dealer, housing, and transports. All canaries chirping loudly.

Canaries aside, there are, with one exception, few signs of major problems which suggests any decline is likely to be corrective. Cumulative Advancing Declining Volume, while showing negative divergences to price, is not showing major distribution (excepting small caps). And the credit markets remain constructive.

The one major issue is valuation which is a poor timing indicator but a good risk indicator. Put simply, the extreme high level of valuation suggests that “bad news” would have an out sized effect on the market. Thus, caution is warranted.

Longer dated Treasury yields remain deeply oversold, and while they appear to be headed lower, there is more risk of a corrective rally in yields.

Outlook and Strategy

The great advantage of employing Tactical Asset Allocation to manage our portfolios is that we don't have to figure out where the market is going. Our Tactical Adaptive Global, Tactical Adaptive Income, and Tactical Adaptive Innovation strategies evaluate dozens of possible trend conditions across each of the 32 funds in our baskets and picks the best combination of direction, strength and confidence. Across a full market cycle, it gets far more fund selections right than wrong and when it does get one wrong, it corrects the problem.

But that doesn't mean we shouldn't pay attention to what is going on in the markets. Tops in equity markets are processes, not events. From all appearances the topping process began in January 2018 and continues even as the big cap indexes (unaccompanied by the rest of the troops) continue to push slightly higher.

I don't need to recapitulate the long lists of reasons provided by financial analysts and commentators to explain why the equity market should rise or fall. There are two basic facts at play:

  • The economic cycle is long in the tooth and losing steam from the 2017 fiscal stimulus while equity market valuations are extreme even as corporate earnings appear to be slowing. Interest rates have plummeted in the expectation of quick Fed easing. Unfortunately, it is the weakening economic conditions which are driving the expectations for Fed easing. The transportation sector provides us with a valuable economic canary and it continues to deteriorate.
  • Equity prices are based on the multiple of earnings which investors are willing to accept for the perceived risk. A bear market can not begin in earnest until investors shift their risk perception from positive to negative leading to significant reductions in market multiples. Credit markets are telling us that investors have reached levels of "concern" but not "fear".

The first fact tells us that we are somewhere near a top while the second tells us that we should remain constructive (but careful) on equities until investors reverse their risk perception.

Earl Adamy