Portfolio Rebalance / August 09 2022
Observations on Signal Sigma Strategies weekly positioning and transactions
Tuesday is the day when all of our strategies rebalance their asset class holding weights. This week features a “return to normal” for our models, and the current rebalance situation is also instructive for how strategies work.
If our algorithms had a voice, here’s what they would say:
“If SPY closes above 412.80 on Monday’s session, equities are eligible for inclusion in Signal Sigma portfolios.”
The 412.80 level represents Z-Score -1.00, the lower limit for buying an asset class that is in an uptrend (such as SPY right now). SPY closed at 412.99 yesterday, with a Z-Score of -0.99. This qualifies equities for inclusion by a whisker.
But not all models invest the same way, and here’s where the main distinction occurs: while Enterprise and Nostromo “target” equity exposure, they do not yet trade, but instead wait for a BUY signal. That’s because this approach works well with ETFs.
Horizon, on the other hand, just trades, regardless of signals. That’s because Horizon is meant to be a more aggressive model and dealing with single stocks does not require any further confirmation. In fact, using trading signals with this strategy reduces long-term performance.
Here’s a visual representation when looking at equities:
Now that we have this base covered, let’s see exactly how our strategies are rebalancing. At the end of the article, we will sum up our own actions in the Sigma Portfolio.
Enterprise Strategy
Enterprise, our most conservative model, carries 24% commodities exposure, with the rest of the portfolio allocated towards cash.
Since this model only trades 4 asset class ETFs, we use it to judge overall portfolio positioning.
The strategy is aiming to close the position in commodities completely, on the first available sell signal. This will not be so easy to come by without a breakdown in prices however. DBC is still just above “oversold”, on a MACD BUY signal that has yet to turn lower.
TLT will be initiated at a 14% allocation on the first available BUY signal. This makes sense given the fundamental and technical backdrop. We have already added TLT to the Sigma Portfolio at lower prices. TLT has pulled back from overbought, so it needs a bit of further consolidation before Enterprise will buy it as well.
Allocation to SPY is the big news in terms of targeting, as discussed above. However, with the market at extreme short-term overbought levels, it won’t be possible to find a BUY signal here. Since that signal would occur at lower levels, it also means SPY will “drop out” of the targeting range. We won’t see equities in this model for a while.
Cash reserves (USD) continue to keep this strategy out of harms’ way with a hefty 76% position.
Nostromo Strategy
After scoring a big win on nat gas (UNG), Nostromo took the small loss on oil (USO). It is now sitting in a cool 100% CASH position.
Like Enterprise, it is waiting for BUY signals on equities (SPY) and treasuries (TLT). We can already tell you that treasuries have much better odds of being included in this model for the time being.
For more info about how Nostromo targets sectors or factors within a broader asset class, read this article. The first part sheds some light on the selection process going on in the background.
Horizon Strategy
Horizon, our most aggressive strategy, is finally doing what it’s supposed to do - lever up and buy stocks.
A 90% exposure to risk assets just before tomorrow’s inflation report is quite a ballsy move. This is paired with a 14% bonds position that would theoretically hedge some volatility. TLT got increased by 3% today. Cash levels are negative, at -4%. Horizon senses weakness in the USD and is bent on squeezing out any shorts.
The equities portfolio is comprised of 10 stocks. Positions will get stopped out automatically if by this time next week the market will sit below the Z-Score -1.00 level (which is VERY close). This is the reason that in our own portfolio, we are not going to be in any way as aggressive.
The positions initiated today at 9% weight each are:
ADM
ENPH
GLPI
GPC
MLI
NXST
RFP
RS
SCI
XOM
Takeaway
We recognize the bullish developments in the overall market. But we are not just going to plunge the Sigma Portfolio into a huge equities bet right before the inflation report (even granted the fact that some of the positions here might benefit long term from inflationary pressures). We are instead adding 1% of each position, at the market’s close. If we get a decent pullback to support, we will use weakness to complete the overall positioning.
Andrei Sota