Tactical Asset Allocation – March 2021

Tactical Adaptive Strategies Update


Two of our three strategies delivered gains for March.

Adaptive Global finished with a gain of 1.3% for the month and 5.8% Year To Date. The gain was led by positions in the S&P 500 ex-growth and Asia Pacific equities. Commodities which have been dominating returns, took a rest.

Adaptive Income finished with a gain of 0.7% for the month and 4.1% YTD. Adaptive Income was invested entirely in high yield.

Adaptive Innovation finished with a loss of 4.7% for the month and gain of 2.1% YTD. Our ARK funds incurred losses for the month which were significantly ameliorated by the Treasuries used to manage volatility. As discussed in last month’s update, I continue to consider the ARK funds a worthwhile investment for a small portfolio allocation.


The financial news has been full of details on how overvalued the equity market has been for several years now. The number of quantitative and qualitative measures which are at extremes has only grown longer and deeper as the equity market has moved higher.

Valuation measures are irrelevant as tools for timing the market. However valuation measures are a good roadmap for relative risk in owning equities.

This weekend I pulled up a monthly chart of the S&P 500 back to the start of this secular bull market in 1982. I drew a regression line from the beginning and then drew a 4 standard deviation channel around the regression. The S&P 500 is 300 points above the top of that channel. Next, I drew a (steeper) regression line from the 2008 low and then drew a 4 standard deviation channel around the regression. The S&P 500 is 100 points above the top of that channel.

Regressions are useful because they give us probabilities, in this case for the longer channel:

  • 1 standard deviations: 68% of occurrences will fall inside 2750
  • 2 standard deviations: 95% of occurrences will fall inside 3000
  • 3 standard deviations: 99.7%  of occurrences will fall inside 3300
  • 4 standard deviations: 99.9% of occurrences will fall inside 3650

So what does this have to do with Tactical Asset Allocation? After all, TAA strategies are designed to lower investment risk by discarding positions which are performing poorly. And the month by month tables shows that each of the strategies has done a remarkable job in managing investment risk.

That said, each of our strategies has a significantly different risk and reward profile.

  • Adaptive Global 14.9% CAGR versus 7.7% max monthly drawdown
  • Adaptive Income 9.9% CAGR versus 3.9% max monthly drawdown
  • Adaptive Innovation 29.3% CAGR versus 12.2% max monthly drawdown

This provides an opportunity to use our TAA strategy allocations to adjust our portfolios to extremes in valuations.


From the April 2nd Market Monitor

"The major indexes continued to move higher this week led by the NASDAQ 100 and Housing Index. As suggested last week, it appears that having run the mid and small cap stocks higher, the markets are once again rotating toward big cap and tech. The short term S&P 500 target at 4012 was exceeded on Friday and our primary target at 4136 appears to be well within grasp. For conversation purposes, there exists an Extreme Blow-off Target at 4531 … color me “dubious” but nothing should be considered impossible.

Our Speculation Index is taking a rest. It remains to be seen if this is simply another market rotation or investor risk appetites are becoming sated.

Equity market valuation has risen to yet another record high at 197% of GDP. Needless to say, all valuation measures are stretched beyond belief. The reversion, when it occurs, is likely to exceed all modern historical precedent. Markets run on investor psychology and the reversion will not occur until there is a major shift.

The Credit Markets Index remains slightly negative although it improved a bit this week. While rising rates have been exerting negative pressure on the Index; spreads to Treasuries have remained flat. This week’s improvement in the Index was due entirely to a resumption in the decline of high yield spreads which are at historically low and extreme levels.

The yield on the 10 year Treasury retreated a few more basis points this week following a meteoric 0.75% rise. The rise in yields appears to be consolidating ahead of a move higher; quite likely 2%+ with possible targets up to 2.75%.

I am in the camp which believes that the Fed will be forced to take action to cap rates on longer maturities if the 10 year Treasury moves much north of 2%. Actions could include: twisting the yield curve (buy long maturities, sell short maturities), QE (increase purchases of longer maturities), or Yield Curve Control (announcing yield caps and purchasing all of the supply which is not met by demand).

My general sense from all of the data is that the market is running out of room to rally on many fronts: valuation, momentum, and interest rates. This is not the same as turning into a bear market as there are few signs of the material reversal in investor psychology which would presage a major decline."

A Personal Note

As men get on in years, our bodies tend to shrink a bit … with the exception of our prostates. Mine has been no exception. My urologist put me on Tamsulosin years ago and more recently added Dutasteride, the latter a drug which quickly showed some nasty side effects. He also informed me that my prostate had grown too large for anything by invasive surgery.

I am a first class researcher so I began reading published research and clinical reports on possible alternatives. The HoLEP procedure quickly stood out for being minimally invasive, extremely low-risk, and producing superb results with prostates of all sizes.

I traveled to Tucson AZ in mid-April ago to have the HoLEP performed by Dr Joel Funk, one of the country’s leading HoLEP surgeons. The speed of recovery and results have been nothing short of amazing and it gave me great pleasure to throw both the drugs in the trash.

With Spring in the air, vaccines in plentiful supply, and Easter at hand; I want to wish the very best to all of my subscribers and followers.

Thank you for reading.

Earl Adamy