Tactical Asset Allocation – May 2023

Tactical Adaptive Strategies Update


Strategy: Adaptive Global finished the month with a loss of 0.94% and a YTD gain of 2.23%.  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 0.46% for the month and a YTD gain of 9.68%. It has a 22+ year CAGR of 6.5%, maximum monthly drawdown of 50.8%, and monthly standard deviation of 15.3%.

Strategy: Adaptive Income finished the month with a loss of 0.98% and shows a YTD gain of .60%. With a 22+ year CAGR of 9.2%, 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 1.14% and a YTD gain of 2.64%. It has a 22+ year CAGR of 3.8%, 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.




While it would be easy to blame this month’s decline on not being invested in the Tech Titans, the real reason lies in Treasuries and investment grade bonds both of which have suffered losses of 1%+ while our equity performance was mixed.

This is a particularly challenging market in which quality trends are challenging to identify and fleeting when they are as is evident from the Tactical Model’s analysis of the 27 funds in which we invest across the major asset classes and credit spectrum.

Looking at the bigger picture, 7 stocks in the S&P 500 have returned 44% this year. The other 493 have returned just 1%. This is not sustainable.

Our 22+ years of history for the TAAStrategies says the investment prospects and results will improve.

Strategy and Outlook

The Strategy and Outlook has been updated. As usual, no major changes but a few adjustments.

Market Conditions Model

Several years ago, I invested a good deal of time in researching and testing improvements to our Market Conditions Model but was unable to come up with anything which works as well as the second generation model we’ve been using since 2018.

Of the 280 months since January 1, 2000, 108 have been Favorable with 24%+ CAGR, 90 have been Balanced with 9.3% CAGR, and 82 have been Hostile with 7.3% CAGR. Improved identification of Favorable conditions would contribute meaningfully to overall strategy performance.

Initial development of an improved model was completed in April. It is now undergoing testing of each of the component indicators. I hope to complete component testing during June.

What Do Our Models See?

Market Conditions Model: The Market Conditions Model, which oscillated between Hostile and Balance during most of April, settled on Balanced for the rebalance at the end of April. The shift from Hostile to Balanced appears to be more reflective of indecision than a firm trend.

Tactical Model: The Tactical Model calculates TrendScores for both short and intermediate trends for all 27 of the funds we use. The current environment is marked by a great deal of uncertainty. 12 funds (down from 17 last month) show positive trends; however only 3 of these rank “high” in confidence for trend persistence. Again, this is most reflective of indecision.

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 May 26th Market Monitor

The major indexes delivered slightly positive movement this week except for the NASDAQ 100 (up 3.6%) and Housing (down 2.9%). The S&P 500 was up 0.3% reaching its short term target of 4202. The big/mega caps are neutral/overbought in the intermediate term and bullish/rising in the short term. The remaining indexes are mixed. The next short term target for the S&P 500 is 4242 and intermediate term target is 4300.

The Daily and Weekly ValueLine Model indexes have barely moved after triggering sell signals several weeks ago. This divergence to the S&P 500 is worthy of notice.

Cumulative Advancing Declining Volume remains negative with major bearish divergences to price for many weeks now. While these divergences can persist for some time, volume leads price so either the divergences will be repaired or price will decline.

I maintain a large number of charts not generally referenced in my weekly commentary. One of them is a set of breadth ratio charts (S&P 500 Equal v Cap Weight, S&P 500 v 100, Russell 2000 v S&P 500, Nasdaq Comp v 100, Nasdaq 100 Equal v Cap Weight). All 5 charts remain in historically sharp decline signaling extremely narrow market breadth.

The Credit Markets Index declined to -20% this week and yields trended up while spreads remained neutral. Credit conditions remain relatively loose considering the state of the economy. That said, the quarterly Senior Loan Officers Opinion Survey, which historically leads high yield spreads, is showing the largest divergence since 2000 suggesting spreads are due for a major rise. (see chart from last week’s Market Monitor).

The downside target in the 10 year Treasury at 3.20% held support six weeks ago. The 10 year Treasury rose another 12 basis points this week to 3.81% exceeding first resistance at 3.71. Next resistance is 3.97%, which if broken, would provide initial confirmation of a bull flag in yields pointing to new highs with a typical target of 5.0%.

Across other metrics:

  • Both Daily and Weekly ValueLine Models are on sell signals (risk off)
  • One of the VIX Models has moved to a sell signal (risk off)
  • The Short Term Breadth Model is negative for both issues and volume (risk off)
  • Consumer Discretionary is getting a bid (risk on)
  • The growth/value ratio is favoring growth (risk on)
  • The Speculation Index has stopped declining (neutral)
  • 7 of 7 former big tech market leaders are showing accumulation (risk on tech mega caps)
  • Inflation expectations are moving up (risk off)
  • The 10 year/3 month Treasury spread remains at a historically negative level of -1.31%, continuing to indicate severe risk of recession

Overall, the equity market is in very poor condition but has managed to expand the upper boundary of its trading range (SPX 3900-4300) on the back of a handful of stocks. We lived through a similar situation in the late 90’s; however the interest rate environment was nothing like what we are currently experiencing. In my view, the risks remain tilted considerably to the downside.

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.