Tactical Asset Allocation – September 2022

Tactical Adaptive Strategies Update


Adaptive Global spent the month in cash and shows a gain of 0.15% YTD.  Adaptive Global is our most broadly diversified “go anywhere” strategy with a 22+ year CAGR of 14.4%, a modest maximum drawdown of 7.7%, and a low 9.3% standard deviation of monthly returns.

Adaptive Income spent the month in cash and shows a loss of 3.16% YTD. With a 22+ year CAGR of 9.3%, this strategy captures nearly $5+ dollars of gain for every $1 in loss. Adaptive Income sports our lowest maximum drawdown of 4.0% and our lowest volatility with a standard deviation of just 4.3%.

Adaptive Innovation has been in cash since March 1 and shows a loss of 2.76% YTD. This is a niche strategy intended to be used for a very small portion of a diversified portfolio. Adaptive Innovation sports a 6 year CAGR of 18.1%, maximum drawdown of 20.3%, and standard deviation of 16.5%.

The S&P 500 finished with a loss of 9.24% for the month and a loss of 23.93% YTD. It has a 22+ year CAGR of 5.9%, maximum drawdown of 50.8%, and standard deviation of 15.3%.

The Vanguard Total Bond Market Index Fund (entirely investment grade) finished with a loss of 4.38% and shows a loss of 14.83% YTD. It has a 22+ year CAGR of 3.8%, maximum drawdown of 16.8%, and standard deviation of 3.9%.

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


Cash Is A Position

I’ve spent the past 40+- years actively participating in the markets. “Doing something” in the market has been an integral part of my life for decades. In fact, I think it is part of my DNA! It is very hard to let a sizable portfolio just sit in cash but that is exactly what Adaptive Global, our primary strategy, has done for 3 months now.

So I’ve had a lot of time to think about “cash” which has led me to the understanding that cash is a position when the alternative is losing money. What is the alternative?

The baskets for our three tactical strategies encompass a broad mix of 32 funds including domestic and international equities, fixed income across the gamut from Treasuries to junk, domestic and international real estate, commodities, and precious metals. Cash is a position when the TrendScore for every security in our basket is in decline.

We have avoided the heavy losses suffered by most indexed managed funds during 2022.

What To Do With Cash?

Interest rates are rising. Some brokers, such as Interactive Brokers actually pay decent interest on cash (2.58% on balances over $10K). Check rates on linked money market funds at your broker. Consider linking a demand savings account to your brokerage account for ACH transfers (Ally Bank pays 2.1%). The BIL ETF (mentioned as a cash alternative in the Rebalance Letters) invests exclusively in 1 to 3 month Treasuries.

The Everything Bear Market will not last forever!

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 September 2nd Market Monitor

The major indexes were down for the week but less so than the previous two weeks. Most made new lows. Intermediate term momentum is bearish and oversold while short term momentum is bearish with bullish divergences. This is exactly the combination which is capable of producing a sharp counter-trend rally.

Cumulative Advancing Declining Volume is confirming the new lows in the indexes and most sectors. This suggests that there is more downside.

The Credit Markets Index declined sharply this week as spreads to Treasuries rose more uniformly across the global credit spectrum. The combination of sharply rising yields and sharply rising spreads on a global basis is indicative of a high degree of risk in the credit markets.

The 10 year Treasury hit my long standing target of 3.94% this week and closed at 3.8%. While the next target lies at 4.88%, I suspect that the odds of actually getting there are quite low.

Across other metrics:

  • Consumer sector preferences shows signs of shifting from Discretionary to Staples (risk off)
  • Investors are showing early signs of shifting from Value to Growth (risk on)
  • The Speculation Index is declining sharply (risk off)
  • 6 of 7 previous big tech market leaders continue lagging (risk off)
  • While the VIX models have shifted bearish, the VIX indexes are showing bullish divergences. The VIX indexes have exhibited very unusual behavior during this bear market.
  • Inflation expectations are turning down sharply (risk on)

Near perfect conditions are in place for a sharp rally; however the preponderance of intermediate term technicals weigh bearish. This strongly suggests that any rally will fail and the indexes will move lower. The primary S&P 500 targets remain 3390 and 2999.

In my view, the equity decline is being driven by credit market conditions which continue to deteriorate sharply. The downside risks from this deterioration can not be overstated.

Thank you for reading.

Earl Adamy

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