Tactical Asset Allocation – November 2022

Perspective

Time To Get Back In The Water!

There are two critical parts of investing: knowing when to reduce risk and knowing when to increase risk. The TAAStrategies bring a disciplined, mechanical process to our investing. This allows us to avoid the emotional attachment to our funds when they appear to be going up and emotional attachment to cash when the funds appear to be going down.

We have credible history for the Adaptive Global and Adaptive Income strategies back to 2000. 2022 is the only year that either strategy has spent a significant part of the year sitting in cash. The cash allocation has been a blessing in light of the 13.2% YTD decline in the S&P 500 and the 12.9% YTD decline in the Vanguard Bond Fund which is limited to investment grade bonds.

We are back in the market although modestly invested.

Bonds have been mauled during 2022 but a look at the history of Adaptive Income suggests prospects may be looking up.

There are strong indications from the Fed that it plans to begin slowing the rate of increase in the Fed Fund rate beginning in December. The last two times the Fed shifted from aggressive rate increases into a final year of measured increases were 2006 and 2018.

During both years, Adaptive Income made excellent use of its ability to switch among the six ETFs representing different sub-classes of domestic fixed income. For 2006, Adaptive Income shows a return of 8.4% with a Maximum Monthly Drawdown of 0.1% and an astounding Up/Down Ratio (gains / losses) of 14194%. 2018 shows a return of 6.6% with a MMD of 0.8% and an extremely high Up/Down Ratio of 655%.

I want to emphasize here that the market will do whatever it wants to do and that there are no guarantees. That said, the risk reward setup here looks reasonably decent while we wait for more clarity from the equity market and Adaptive Global.

Bull Market Ahead?

Many commentators use an arbitrary 20% gain or loss to label bull and bear markets. While a 20% rally from the closing low lies at 4292, a far superior method for labeling bull and bear markets is to use the information provided by the closing price structure on the weekly chart.

Quite simply, a bear market requires a series of lower lows and lower highs while a bull market requires a series of higher highs and higher lows. Given this structure, we easily confirm whether a 20% move in either direction is truly a bull or bear market.

The weekly closing high in the S&P 500 occurred on December 31 at 4766. This was followed by a series of lower lows and lower highs through 3583 on October 14, a 23.4% bear market decline.

Since then the S&P 500 has notched a 13.6% rally consisting of a spikey series of higher highs and higher lows. What would it take to turn this rally into a bull market? The last major pivot high preceding the October low occurred on August 12 at 4280 … 19.5% above the October 14 closing low. Should the S&P 500 exceed 4280 without making a lower low, we should treat it as a bull market even without the full 20%.

Whether a new bull market can exceed the previous all time high is another question.

RIP Adaptive Innovation

I introduced Adaptive Innovation to provide low risk investment access to innovation technologies. It provided significantly higher return for significantly higher risk and was therefore intended for use as a niche allocation in a portfolio.

Tactical Innovation has mitigated risk by remaining in cash for the last 10 months of 2022. However, the Compound Annual Growth Rate (CAGR) for Tactical Innovation has fallen to 17.7% with a Maximum Monthly Drawdown (MMD) of 20.3%. The risk:reward for Tactical Innovation is no longer favorable when compared to the 14.3% CAGR of Adaptive Global with a MMD of 7.7%. I am discontinuing the strategy.

Existing subscribers will have access to Tactical Innovation through the end of 2023.