Tactical Adaptive Strategies Update
Strategy: Adaptive Global finished the month with a loss of 2.37% and a YTD loss of 0.23%. Adaptive Global is our most broadly diversified “go anywhere” strategy with a 22+ 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 loss of 2.17% for the month and a YTD gain of 10.58%. It has a 22+ year CAGR of 6.4%, maximum monthly drawdown of 50.8%, and monthly standard deviation of 15.3%.
Strategy: Adaptive Income finished the month with a loss of 0.31% and shows a YTD gain of 3.11%. With a 22+ 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 loss of 1.57% and a YTD loss of 2.58%. It has a 22+ year CAGR of 3.5%, 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.
The return to market interest rates means that cash is no longer trash. We use the T-Bill ETF (BIL) (SEC Yield 5.25%) for our cash allocation in both of the TAAStrategies.
The focus of the TAAStrategies is to select the funds which exhibit the strongest trends and highest probability of trend continuation. However, there are times when few or no funds meet the selection criteria.
When does the Tactical Model provide an allocation to cash? The Tactical Model analyzes the performance Trend Scores, confidence levels, and volatilities of all funds in the strategy basket. There are several conditions which can lead to an allocation to cash:
- The Model identifies no funds which are suitable for investment, the entire strategy allocation is set to cash. This generally occurs when all funds have negative Trend Scores.
- The Model is unable to fill all available fund allocation slots with funds which are suitable for investment.
- The Model identifies funds suitable for investment but the confidence levels or volatilities necessitate reduced allocations to the funds.
Adaptive Global includes BIL in its fund basket for all three market conditions: Favorable, Balanced, and Hostile. BIL can be included as a primary fund allocation. BIL will generally be allocated when higher yielding funds are unsuitable for allocation or exhibit volatilities which preclude a full allocation.
Adaptive Income includes BIL’s slightly longer duration cousin SHY (SEC Yield 5.03%) in its fund basket for all market conditions. SHY will generally be allocated when higher yielding funds are unsuitable for allocation or exhibit volatilities which preclude a full allocation.
What Do Our Models See?
Market Conditions Model: The Market Conditions Model shifted from Hostile to Balanced at the end of April 2023. The Model remains in Balanced condition for the rebalance at the end of October.
Tactical Model: The Tactical Model calculates TrendScores for both short and intermediate trends for all 27 of the funds we use. The current environment shows nearly all equities and fixed income in negative trends.
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 October 27th Market Monitor
All major indexes with the exception of Housing (+0.1%) declined this week led by small and mid (smid) cap indexes and the NASDAQ 100. All indexes are oversold on both intermediate and short term basis. The Banking index has turned intermediate term bearish while the other indexes are a mix of bullish (big cap) and neutral (smid). Price targets on all indexes are lower … a little under 2%. The Russell 2000 has broken below its year long consolidation and targets 6% lower (minimum).
The S&P 500 entered correction territory this week (-12.2% high to low) when it hit my 4100 target (4104 low). There do not appear to be adequate bullish divergences in place to support a decent rally here. The next major support is 4000+- where we have an extended price target coupled with a bull market trendline from the 2020 low.
Cumulative Advancing Declining Volume showed some improvement but the trends remain bearish for both major indexes and sectors. We have bearish confirmation on all indexes and 11 of 12 sectors. Info Tech is the only sector showing a bullish divergence and Utilities looks close. We need to see bullish divergences to have a prayer of a tradeable low much less a credible rally.
The Credit Markets Index declined again this week to -57% with both yields and spreads rising globally across the quality spectrum from investment grade to junk. The Credit Markets Index is in bear market territory.
The 10 year Treasury closed down 8 basis points which is not much of a pullback from last week’s 5%. 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. The Treasury ETFs continue to show distribution which is supportive of a move higher in rates. That said, there are no really credible targets above 5.23 absent a correction which provides new targets. In other words, we are likely at or close to an intermediate term high in rates.
Across other metrics
- The ValueLine Weekly and Daily models remain on sell signals with lower lows (risk off)
- Both VIX Models are on sell signals (risk off)
- The Short Term Breadth Model is positive (risk on)
- Consumer Staples is getting a bid over Discretionary (risk off)
- The growth/value ratios are favoring growth in large caps (risk on)
- The Speculation Index is headed down (risk off)
- Deterioration among big tech leaders: 1 is bullish, 2, are neutral, 5 are bearish (risk off)
- Inflation expectations are rising (risk off)
- The 10 year/3 month Treasury spread appears to be in a rising trend from its long stay below -1.0%. The rise from below -1% historically indicates a recession is getting closer.
- Petroleum and precious metals are getting a bid
The lack of bullish divergences in both price momentum and in CADV coupled with the continued decline in the Credit Market Index is very concerning. This action suggests that the bear market may be about to resume.
I have been warning of the shift from monetary dominance to fiscal dominance for 3 months now. I believe firm evidence is beginning to show across the markets:
- Treasury yields have moved higher and credit conditions are tightening
- The Treasury MOVE index is extremely elevated and threatening to move higher
- The price of gold shot 10% from 1824 to 2006 in just 16 trading days and appears to be nearing a major breakout
- The equity market is dropping while its volatility is rising
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 the Treasury market.
Thank you for reading.
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Exceptional results are due entirely to the complementary strengths of our Market Conditions Model and our Tactical Model.