Tactical Asset Allocation – November 2023

Tactical Adaptive Strategies Update

Performance

Strategy: Adaptive Global finished the month with a gain of 0.45% and 0.21% YTD%.  Adaptive Global is our most broadly diversified “go anywhere” strategy with a 23+ year CAGR of 13.8%, 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 9.13% for the month and a YTD gain of 20.68%. It has a 23+ year CAGR of 6.8%, maximum monthly drawdown of 50.8%, and monthly standard deviation of 15.4%.

Strategy: Adaptive Income finished the month with a gain of 1.21%% and shows a YTD gain of 4.41%. With a 23+ year CAGR of 9.1%, 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 gain of 4.59% and a YTD gain of 1.89%. It has a 23+ year CAGR of 3.7%, maximum monthly drawdown of 17.1%, and monthly standard deviation of 4.3%.

For details, see the links below to strategy descriptions, charts, and tables or the Insights page.

Perspective

Final Month of 2024

The holiday season has gotten a start and will be in full swing in just a few weeks. I want to wish all of you and your families a healthy and happy holiday season.

While the Christmas holiday generally offers up a pretty dull trading period; the next three weeks may be a bit more exciting as the various market and economic headwinds collide.

Sea Change

My “Outlook and Strategy” writeups began as a process to bring order and discipline to my views of the markets in a framework which would be useful in guiding our personal investments. My views are shaped by a combination of my deep interest in inter-market relationships, a wide ranging reading list, long term technical analysis and consideration of how the pieces fit together. I began sharing my Outlook and Strategy with subscribers in the Rebalance Letter a little over 5 years ago.

I have been presenting the theme of major trends in transition for several years now. My latest Outlook and Strategy was updated at the end of October:

  • Globalization > regionalization
  • Surplus supply > contracting supply
  • Cheap energy > expensive energy
  • Cheap credit > expensive credit
  • Expansive liquidity > tightening liquidity

The Outlook and Strategy continues with a series of topics, each covered in considerable detail:

  • Fiscal Policy - accommodative
  • Monetary Policy - Balance Sheet accommodative in emergencies
  • Inflation - not transient
  • Interest Rates - rising but Fed is constrained
  • Energy - crisis and opportunity
  • Credit Markets - volatile
  • Equity Markets - volatile

While each of these topics is covered in considerable detail, the overall theme is worthy of note. The markets are undergoing a sea change which requires that investors adapt to an entirely new investment landscape. The transition will continue to be rocky. Here is but one example of real and possible change:

Traditionally, bear markets and recessions bring bond yields down with the resulting rise in bond values helping to buffer losses in equities. The last bear market in 2022 turned that tradition on its head.

ooking forward, what if the next recession reduces tax collections to the point where the increased deficit drives bond yield higher rather than lower?

The TAAStrategies have no biases, no institutional memory, no prior positions to defend, and no learned habits to break. They are uniquely suited to transitioning to whatever new investment trends lie ahead. Why? Because they follow a statistically proven mechanical process across a wide universe of funds to identify investable trends while using cash as a defensive investment.

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 December 1st Market Monitor

All indexes rose this week led by Banking, small caps, and mid caps while the big cap indexes lagged. The big cap indexes remain bullish and overbought in both intermediate and short term while the smid caps have shifted to neutral and rising in the intermediate term and neutral and overbought in the short term. The target for the S&P 500 remains 4604 just 9 points above Friday’s close. This level is likely to trigger the expected pullback before the SPX makes an attempt on the next higher target at 4739.

While the Nasdaq 100 remains the strongest of the indexes, it is showing signs of fading as the market is now clearly broadening out with participation from the smid caps. This provides credibility to the rally which could see new all time highs in the big caps.

All 5 Market Breadth Ratios (SPX equal weight vs cap Weight, S&P 500 vs S&P 100, Ru2000 vs S&P 500, Nasdaq Comp vs Nasdaq 100, Nasdaq 100 equal weight vs cap weight) improved this week. This decreases the risk of a near-term rally failure.

Cumulative Advancing Declining Volume improved this week, particularly in the short term although not enough to confirm the rally in most indexes and sectors. Only 5 of 7 sectors are indicated as bullish.

The Credit Market Index improved this week from a neutral +3% to a bullish 27% as a number of spreads shifted into sustained decline. The Credit Market Index is signaling a significantly loosening in credit conditions. One notable exception is a persistent rising trend in the lowest quality CCC and below spreads which suggests that credit conditions are not improving for smid caps.

The 10 year Treasury fell 25 basis points this week to 4.23% just 2 bp above a critical 4.21% weekly close. The next upside target is 5.20%-5.23% last visited in 2006-2007 making it an important level. Important levels tend to be revisited. What would take the 5.20% target off the table? A weekly close below support at 4.21%. The decline in yield was supported by fresh accumulation in the intermediate and long term Treasury ETFs.

Across other metrics

  • The ValueLine Weekly and Daily models remain on Buy signals (risk on) Note: the models are catching up to the S&P 500
  • Both VIX Models are on buy signals (risk on)
  • The Short Term Breadth Model is failing to confirm the later stages of this rally (risk off)
  • My new Offense Defense Indicator is showing offense (risk on)
  • The growth/value ratios have shifted from growth to value (risk off)
  • The Speculation Index is rising (risk on)
  • Big 8 “tech” stocks: 4 are bearish, 4 are bullish (neutral)
  • Inflation expectations are falling(risk on)
  • The 10 year/3 month Treasury spread rose 100+ basis points from its -1.63% low; however the spread tightened 29 bp this week. The rise from below -1% historically indicates a recession is getting closer.
  • Petroleum and industrial metals remain in decline while precious metals are getting a bid

Conditions appear to favor continuation of the rally as the mega/big caps rest while the small and mid caps appear to be getting a bid. The big caps are likely to pause near here before attempting to move higher.Seasonals favor the small caps.

I have been warning of the shift from monetary dominance to fiscal dominance for 3 months now. I believe firm evidence is visible across the markets:

  • While Treasury yields have pulled back from their highs, it remains to be seen if this is sustainable in the face of large Treasury issuance
  • The Treasury MOVE index remains elevated (above 90) and periodically shoots higher
  • Treasury auctions at the long end of the curve are seeing buyer pushback which is forcing the Treasury to concentrate issuance at the short end of the curve..
  • The price of gold shot 10% from 1824 to a record high just shy of 2100 in just a few week and appears to be nearing a major breakout

While war is always a concern, I believe these shifts have more to do with the growing realization that the growing deficits and rising interest expense represent a threat to both the Treasury and equity markets.

Thank you for reading.

Earl Adamy

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