Portfolio Rebalance / August 16 2022
Observations on Signal Sigma Strategies weekly positioning and transactions
As of today's article, we are testing a new format including a video segment to go along with the written part.
Tuesday is the day when all of our strategies rebalance their asset class holding weights. This week does not feature major changes from the last, as the market’s continuation to the upside triggers no new BUY signals. Horizon (our most aggressive model) is holding on to recent equity exposure and is simply rebalancing positions to target weights.
Enterprise and Nostromo, our more conservative models, are targeting equity exposure, but are waiting for a pullback or consolidation in order to execute trades. Here’s where we stand from a multi-asset class perspective vs the US Dollar (whose ascent has wrecked returns for every other asset class):
An amazing statistic: for the past 2 years, holding UUP (US Dollar ETF) would have given an investor better returns than a combined portfolio of major asset classes (SPY + TLT + GLD + DBC). The dollar is king, and we will cover the impact of a strong USD in an article later this week.
From a purely technical perspective, equity risk is included in this week’s allocations, as SPY is trading in its “regular” regression channel. This logic is used by Horizon, which does not use any signals to fill allocations. Enterprise and Nostromo cannot buy stocks when the overall market is extremely overbought.
With a primer on how algorithms work and allocate, we are at an apparent disconnect. On one side, risk exposure is chased by Horizon. The market is trading in its normal, expected range, and nothing else matters. Not only that, but Horizon sees equities as being relatively cheap. Being a strategy focused on single stocks, it is forming a portfolio of 10 companies and rebalancing positions to 9% each.
Enterprise and Nostromo need to wait for further confirmation that this rally is indeed “real”. The signals that they are waiting for would trigger at lower levels, once the market consolidates sideways or simply reverses course. They are unlikely to trade this week.
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 occur on a negative MACD cross. DBC has recently consolidated around its 20-day moving average and a breakdown in prices will trigger the SELL.
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, and it is primed for a MACD positive crossover.
Allocation to SPY is targeted, 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
Nostromo, our tactical allocation model is sitting in 100 % cash this week (like Michael Burry).
Similar to 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, made some good gains the past week. It has increased equity allocations to 90% of the portfolio, just before the soft inflation report last Tuesday.
The trades it is executing today are simply a rebalance to target allocations. They do not constitute any major shift in strategy.
The equities portfolio is comprised of 10 stocks, at 9% weight each:
ADM
ENPH
GLPI
GPC
MLI
NXST
RFP
RS
SCI
XOM
The most important sector correlations for this portfolio are Industrials, Transports, Technology and Financials, as shown in the table below. These are the stocks that show the best relative performance, sharpe ratio and fundamental strength.
Horizon Strategy Correlation Table
Takeaway
We recognize the bullish developments in the overall market. But we are not just going to plunge the Sigma Portfolio (our real-life investments) into a huge equities bet before we have confirmation that the current rally will “stick”. We are looking to opportunistically increase equity exposure on any pullback that would not violate stop levels. A decent pullback could come at SPY 394 (the 50-day DMA) or 414 level (Support 1 Level). It will take 2-3 months before we can better gauge weather this is a sellable “bear market rally” or a buyable “correction within a bull market”.
Andrei Sota