Tactical Asset Allocation – November 2021

Tactical Adaptive Strategies Update

Performance

Adaptive Global finished with a loss of 2.10% for the month and gain of 15.53% YTD. The strategy spent the month invested in domestic big caps, commodities, and cash. Adaptive Global is our most broadly diversified “go anywhere” strategy with a 20+ year CAGR of 14.9%, a very modest maximum drawdown of 7.7%, and a low 9.4% standard deviation of monthly returns.

Adaptive Income finished with a loss of 0.83% for the month and a gain of 7.26% YTD. Adaptive Income was invested entirely in high yield. With a 20+ year CAGR of 9.8%, this strategy captures $6+ dollars of gain for every $1 in loss. It sports our lowest maximum drawdown of 3.9% and our lowest volatility with a standard deviation of just 4.3%.

Adaptive Innovation finished with a loss of 2.83% for the month and 2.31% YTD. Adaptive Innovation was invested in a combination of innovation and Treasury bonds. This was our first niche strategy intended to be used for a very small portion of a diversified portfolio. It sports a 6 year CAGR of 23.4%, maximum drawdown of 16.6%, and standard deviation of 16.9%.

Adaptive PM & BTC (Precious Metals and Bitcoin) finished with a loss of 2.41% and 0.08% YTD. This strategy is being discontinued.

See the strategy descriptions, charts, and tables on the Strategies page.

Perspective

Risk Off

Our tactical models continue last month’s trend toward reducing risk exposure as seen in the strategy allocations for the final month of 2021.

Tactical Model’s Adaptive Dynamic Momentum algorithm  calculates TrendScores for each of the funds used in our strategies. In assigning a TrendScore, the algorithm examines a wide range of periods for which it calculates momentum, volatility, and statistical confidence .

In preparing the Rebalance Letter, I review the final TrendScore and confidence level for each of the 22 asset classes and subclasses. This is the second month in a row for which the TrendScores and confidence levels have declined, particularly so across fixed income. This trend is reflected in strategy allocations which continue to reduce risk exposure.

Adaptive PM & BTC

The Adaptive PM & BTC strategy has been retired.

Ultimately, the extremely high annualized daily volatility of GBTC is proving the strategy much better suited for a tactical strategy which uses daily, or possibly weekly, rebalancing rather than monthly. At 68.3%, the standard deviation of monthly returns far exceeds that of our other three strategies: Adaptive Global at 9.4%, Adaptive Income at 4.3%, and Adaptive Innovation at 16.9%.

I had expected that it would mature into a less volatile asset class as DeFi (Decentralized Finance) based on blockchain gains a bigger role. Given the continued extreme volatility, I became uncomfortable investing in the strategy personally and in offering the strategy to subscribers.

The Adaptive Innovation strategy will continue to provide some investment exposure to DeFi without crypto.

Market

From the November 26th Market Monitor

After claiming a new all time high on Monday, the S&P 500 declined 3.4%, most of it on Friday.. The small caps declined 5% for the week while the big caps declined half that. All major indexes were down, Housing the least. The intermediate trend for the big caps which drive the market remains bullish and overbought while the short term trend remains bullish but has yet to decline to the oversold levels which would suggest a low.

We had sell signals this week from the Weekly ValuLine Model and one of the two Weekly VIX Models.

Cumulative Advancing Declining Volume showed a surprising bullish divergence to Friday’s decline across all major indexes and 11 of 12 sectors. In other words, while most indexes registered Distribution Days (0.2% decline on higher volume) the decline in volume was not proportionate to the decline in price. Should this continue, it would be supportive for a near term bottom.

The Credit Market Index declined again this week to -70%. Every spread  across quality and across the globe is rising. Every yield across quality and across the globe is rising sharply. As I mentioned last week, this is a situation which tends to have a sudden spill-over to the equity markets as borrowing costs and risks rise for the detritus just under the receding tide. Failure of these trends to reverse, and soon, will prove very negative for the equity market.

The 10 year Treasury has been declining for several weeks; however it remains above its July-August lows. The yield trend remains up.

The current watch list :

  • The Speculation Index pulled back again this week suggesting a pause in investor risk appetite
  • The Russell 2000 and Midcap S&P 600 have pulled back sharply during a seasonally strong period. This after breaking out from a multi-month consolidation.
  • Six of the seven mega-cap leaders are showing strength, FB continues to fail
  • Growth is outperforming value in big caps, value is outperforming growth in small caps
  • Consumer Discretionary remains better bid than Staples which is risk on
  • Inflation expectations are trending higher although they have pulled back
  • Megacaps are increasingly dominating the market amid narrowing market breadth
  • The S&P 500 can not seem to shake its 5 Distribution Days during the past 30 trading days (0.2% decline on higher volume), and 0 Accumulation Days in the past 30 trading days (1% rally on higher volume)
  • The ValueLine Weekly Model continued weakening into a Sell signal this week
  • One of our two VIX Models issued a Sell signal this week .

Last week we warned: “Overall, given the extreme high valuation coupled with new highs in the mega-cap indexes, deterioration in breadth, and tightening credit conditions;, the equity market appears to be running out of gas. The downside risk appears to be greater than the 120 SPX points to the next upside target.” Although the spread to the next upside target in the SPX has nearly doubled, the risks remain to the downside. Watch the 4550 area in the S&P 500 for potential support, then 4300+- if that fails.

Thank you for reading.

Earl Adamy

Ready to learn More about the Strategies?

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

Not ready to subscribe but want to stay in the loop?

Sign up for Earl's Tactical Asset Allocation Strategies newsletter and receive his featured articles and performance updates.

Compares performance of the Tactical Adaptive Strategies to the S&P 500 and Vanguard Balanced Index Fund

Supporting tables for Tactical Adaptive Global. S&P 500 (SPY) and Vanguard Balanced Index Fund (VBINX) can be found below

Our results tables are constructed for three full market cycles beginning in January 2000.

The Adaptive Global table shows backtested results through July 2018 followed by actual results. More information is available in the blog article: The TAAStrategies, A Short History.

The most recent market cycle covers January 2020 to date.

The second market cycle covers October 2007 through December 2019. The Adaptive Global and Adaptive Income strategies were developed using the first 10+- years of data from this cycle while the final years are actual.

The third market cycle covers January 2000 through September 2007. This market cycle was used to provide out of sample validation of strategy results from the second market cycle. The fact that the return and risk metrics for the third cycle are statistically comparable to those for the second cycle validates the process.

The fund baskets for our tactical strategies are constructed from indexed Exchange Traded Funds (ETFs) with just two exceptions, an Open End Fund and a Closed End Fund, both with long history. A number of the ETFs we use were not created until 2007+. In each case, we infill using predecessor Open End Funds (OEFs) for which the indexing and/or subclass is substantially similar to the ETF.

We have been asked if it is possible to extend backtests to the 1970’s. While a few publishers attempt this; we believe it is not possible to produce credible results for all but the most basic TAA strategies due to the lack of funds with substantially similar indexing and/or classification. Doing so would force me to stretch the term "substantial" far beyond my comfort level.

A blank month indicates that the strategy was in cash.

A Caveat

A 35+ year secular bull market in both equities and bonds began in 1982. The last cyclical bull market in equities (and to a lesser extent, bonds) began 10 years ago. Returns during these periods have been historically exceptional. Market returns for the next 10 years are highly unlikely to approach those of the past 10. In fact, there is at least some evidence that market returns have a high probability of being significantly lower and that bonds and equities (which have risen together) may actually begin working at cross purposes.

Investors should not use the statistics shown for our strategies to establish expectations of specific levels of returns or drawdowns. Investors should, however, appreciate that we believe the principles which underlie the Tactical Adaptive Global, Tactical Adaptive Income, and Tactical Adaptive Innovation Strategies are enduring enough to significantly outperform the market in the future, both in lowering risk and in improving returns.

Benchmark S&P 500 (SPY)

Benchmark Vanguard Balanced Index Fund (VBINX)

Compares performance of the Tactical Adaptive Strategies to the S&P 500 and Vanguard Balanced Index Fund

Supporting tables for Tactical Adaptive Income, S&P 500 (SPY) and Vanguard Balanced Index Fund (VBINX) can be found below

Our results tables are constructed for three full market cycles beginning in January 2000.

The Adaptive Income table shows backtested results through June 2019 followed by actual results. More information is available in the blog article: The TAAStrategies, A Short History.

The most recent market cycle covers January 2020 to date.

The second market cycle covers October 2007 through December 2019. The Adaptive Global and Adaptive Income strategies were developed using the first 10+- years of data from this cycle while the final years are actual.

The third market cycle covers January 2000 through September 2007. This market cycle was used to provide out of sample validation of strategy results from the second market cycle. The fact that the return and risk metrics for the third cycle are statistically comparable to those for the second cycle validates the process.

The fund baskets for our tactical strategies are constructed from indexed Exchange Traded Funds (ETFs) with just two exceptions, an Open End Fund and a Closed End Fund, both with long history. A number of the ETFs we use were not created until 2007+. In each case, we infill using predecessor Open End Funds (OEFs) for which the indexing and/or subclass is substantially similar to the ETF.

We have been asked if it is possible to extend backtests to the 1970’s. While a few publishers attempt this; we believe it is not possible to produce credible results for all but the most basic TAA strategies due to the lack of funds with substantially similar indexing and/or classification. Doing so would force me to stretch the term "substantial" far beyond my comfort level.

A blank month indicates that the strategy was in cash.

A Caveat

A 35+ year secular bull market in both equities and bonds began in 1982. The last cyclical bull market in equities (and to a lesser extent, bonds) began 10 years ago. Returns during these periods have been historically exceptional. Market returns for the next 10 years are highly unlikely to approach those of the past 10. In fact, there is at least some evidence that market returns have a high probability of being significantly lower and that bonds and equities (which have risen together) may actually begin working at cross purposes.

Investors should not use the statistics shown for our strategies to establish expectations of specific levels of returns or drawdowns. Investors should, however, appreciate that we believe the principles which underlie the Tactical Adaptive Global, Tactical Adaptive Income, and Tactical Adaptive Innovation Strategies are enduring enough to significantly outperform the market in the future, both in lowering risk and in improving returns.

Benchmark S&P 500 (SPY)

Benchmark Vanguard Balanced Index Fund (VBINX)

Compares performance of the Tactical Adaptive Strategies to the S&P 500 and Vanguard Balanced Index Fund

Supporting tables for Tactical Adaptive Innovation, S&P 500 (SPY) and Vanguard Balanced Index Fund (VBINX) can be found below

The Innovation ETFs used in the Innovation Strategy were not established until 2014-2015 so our history is limited.

There are no predecessor funds which are similar enough to use for infill.

The Adaptive Innovation table shows backtested results through June 2019 followed by actual results. More information is available in the blog article: The TAAStrategies, A Short History.

A blank month indicates that the strategy was in cash.

A Caveat

A 35+ year secular bull market in both equities and bonds began in 1982. The last cyclical bull market in equities (and to a lesser extent, bonds) began 10 years ago. Returns during these periods have been historically exceptional. Market returns for the next 10 years are highly unlikely to approach those of the past 10. In fact, there is at least some evidence that market returns have a high probability of being significantly lower and that bonds and equities (which have risen together) may actually begin working at cross purposes.

Investors should not use the statistics shown for our strategies to establish expectations of specific levels of returns or drawdowns. Investors should, however, appreciate that we believe the principles which underlie the Tactical Adaptive Global, Tactical Adaptive Income, and Tactical Adaptive Innovation Strategies are enduring enough to significantly outperform the market in the future, both in lowering risk and in improving returns.

Benchmark S&P 500 (SPY)

Benchmark Vanguard Balanced Index Fund (VBINX)