Tactical Asset Allocation Strategy Update
Performance
Global Adaptive gained 1.91% for June and is up 1.27% YTD.
Adaptive Income gained 0.64% for June and is up 2.02% YTD.
Both have avoided most of the market whipsaws following the September highs in the equity market.
This is the comment which accompanied the allocations at the end of April: "The Tactical Model finds mixed trends in equities which favor big caps in domestic and international markets and strong positive trends in fixed income. Global Strategy selections for June, constrained by Hostile market conditions, includes a small allocation to big cap value along with a range of mid to long duration Treasuries. Notably, the Model is reducing allocations to long duration Treasuries while increasing exposure to mid and shorter duration.
The Tactical Model finds positive trends and high confidence in all 3 fixed income funds which represent the spectrum of risk from Treasuries to high yield. The Adaptive Income selection for June continues its preference for higher risk and return with high yield bonds. "
Market
Evidence is accumulating that the S&P 500 (SPX) has entered Neverland. Not unlike the fictional island where Peter Pan, its best known resident, refused to grow up, the bull market in this major equity index refuses to fully mature.
Consider that weekly closes for the SPX peaked at 2873 on January 26, 2018; 2930 on September 21, 2945 on May 3, 2019 and 2950 on June 21.. The spread over the past 18 months is a grand total of 77 points or 2.6%. If this is a topping process, and evidence for that is growing, it will be among the longer topping processes in market history.
As for evidence supporting a topping process, there has been little improvement in a broad range of bellwether indexes and sectors which I watch closely even as the big cap indexes reached new highs. While credit conditions have improved from the December lows, they are lagging behind levels seen last September. So too is Cumulative Advancing Declining Volume which measures participation in the equity market.
While lack of major improvements in both credit conditions and breadth are sounding a warning; it looks like the SPX will be stuck in Neverland until investors (and machines) feel considerably more fear. That could happen quite soon, or not. “One way to tell the time is to find the crocodile, and wait until the clock inside it strikes the hour.”
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 Global Adaptive and Adaptive Income strategies evaluate dozens of possible trend conditions across each of the 29 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.
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.
Upgraded Adaptive Income
My decision to release the upgraded Adaptive Income in on June 9th was a bit of an anomaly. I'm not inclined to change strategies mid-month, however the sharp rally in HYG provided an opportunity to reclaim most of May's loss and shift to the new Adaptive Income allocation in a lower volatility ETF. I released a new Adaptive Income whitepaper shortly thereafter which I highly recommend reading if you have not already done so.
One additional advantage of Adaptive Income, not mentioned in the whitepaper, is that there is no overlap of funds between the Global Adaptive and Adaptive Income strategies. Thus, it provides true strategy diversification and its strong risk/reward profile warrants consideration for inclusion in subscriber portfolios.
One other item of note. The year to date gain through May for our old Adaptive Income was 1.55% while the May YTD for the new was 1.37%. The old Adaptive Income (HYG) gained 2.0% (including dividend) between the close on May 30 and the close on June 10 when we switched to HYD. HYD has gained 0.6% since June 10. For a total June gain of approximately 2.6%.
Subscriber Portal
The Market Monitor page in the Subscriber Portal is updated each weekend. It provides an updated assessment on the health of the equity market as well as interest rates, commodities, and precious metals. I highly recommend checking this page on a weekly basis. While this information has no bearing on the Global Adaptive Strategy, this is where you will see signs of shifts in market conditions which may provide more informed perspective than what is generally available.
