Tactical Adaptive Strategies Update
Performance
Strategy: Adaptive Global finished the month with a loss of 1.00% and a YTD gain of 2.18%. Adaptive Global is our most broadly diversified “go anywhere” strategy with a 22+ year CAGR of 14.0%, a very modest maximum monthly drawdown of 7.7%, and a low 9.3% standard deviation of monthly returns.
Benchmark: The S&P 500 finished with a loss of 4.73% for the month and a YTD gain of 13.03%. It has a 22+ year CAGR of 6.5%, maximum monthly drawdown of 50.8%, and monthly standard deviation of 15.3%.
Strategy: Adaptive Income finished the month with a gain of 0.33% and shows a YTD gain of 3.31%. 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 2.59% and a YTD loss of 1.03%. It has a 22+ year CAGR of 3.6%, maximum monthly drawdown of 17.1%, and monthly standard deviation of 4.2%.
For details, see the links below to strategy descriptions, charts, and tables or the Insights page.
Perspective
September
September is historically considered the equity market’s cruelest month and this September has not disappointed. The equity and bond markets are clearly in turmoil, primarily as a result of the Fed’s interest rate raising cycle coupled with a shift in prospects for near term rate cuts.
There are constructive signs that the corrections in both equities and bonds may be nearing an end as we close in on the historically strong seasonal and Presidential cycles which run into year end. Whether the final quarter of 2023 will deliver on its implied promise will be known only in the fullness of time.
What is clear is that neither the Market Conditions Model or the Tactical Model have given up on equities and fixed income. While the TAAStrategies have not entirely escaped the mayhem, they do continue to find niches which have proven defensive.
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 September.
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 most equities in positive trends with low conviction, high quality fixed income in negative trends with high conviction, and high yield income in positive trends with high conviction.
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. The weekly reports are available on the Subscriber pages.
From the September 29th Market Monitor
While it appeared to be a wild week, not all major indexes fell. The mid cap, small cap, and Nasdaq 100 indexes were up while the Broker Dealer, big cap, Housing, and Banking indices were down. The spread between the Russell 2000 (up 0.5%) and the S&P 500 (down 0.7%) was notable for the possible start of a seasonal rotation into small caps. The intermediate trend remains (mostly) bullish and oversold while the short term trend is now bearish and oversold. This combination suggests we are approaching a bottom. Short term or long term remains to be seen but the season and Presidential cycles favor an investable low no later than mid-October.
The S&P 500 target at 4300-4250 has held on a closing basis for the week and the past four trading days (4270 daily closing low). A near perfect setup would be a lower daily close by mid-October testing the bull market trendline at 4230+- setting up a daily bullish momentum divergence and closing the June 2nd gap. This would also work very nicely on the weekly chart setting up a probable move above the July high to at least 4700. Covering the alternative, a sharp break of the bull market trendline would likely signal an end to the bull market.
Cumulative Advancing Declining Volume is showing early signs of a possible shift with the shorter term improving as the intermediate term continues to decline and will likely take some time to repair. The short term Breadth Model is showing bullish divergences across the major indexes for the second week in a row.
The Credit Markets Index declined this week from 30% to 13% on sharply rising yields as spreads are either positive or bullish across the globe and the Chicago Fed National Financial Conditions Index continues to show improvement. The Index is suggesting caution for equities.
The 10 year Treasury closed up another 13 basis points this week at 4.57% after reaching my 4.62% target. The mid and long term ETFs continue to show significant distribution. Aside from the completed cup and handle pattern in the 10 year Treasury which targeted 4.62%, we have a much larger and longer pattern in place which targets 5.00%. I suspect we’ll see a pullback here before the 10 year attempts to move toward 5%.
Across other metrics
- The ValueLine Weekly and Daily models remain on sell signals (risk off)
- The two VIX Models are providing opposing signals. (neutral)
- The Short Term Breadth Model is positive (risk on)
- Consumer Staples are getting a bid over Discretionary (risk off)
- The growth/value ratios are favoring growth in large and small caps (risk on)
- The Speculation Index is headed down (risk off)
- Deterioration among big tech leaders: 3 are bullish, 3 are neutral, 2 are bearish (neutral)
- Inflation expectations are rising (risk off)
- The 10 year/3 month Treasury spread is moving up (-0.72%) from its long stay below -1.0%. The rise from below -1% historically indicates a recession is getting closer.
The SPX targets a return to the all-time high at 4819; however the correction which is now underway must be completed first and the bull market trendline at 4230+- needs to hold on a weekly closing basis. The technicals suggest basing action over the next couple of weeks. We are looking for a bounce followed by a lower low with bullish divergences to initiate the next rally leg. Ideally, this would be supported by modest improvement in credit conditions, primarily a pullback in yields. Risks remain elevated until we see this setup.
The US appears to have entered a period of fiscal dominance which is proving more powerful than monetary policy. The challenge going forward is that the Federal borrowings are crowding private borrowers out of the credit markets. This should prove interesting during the balance of 2023.
Thank you for reading.
Earl Adamy
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