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 Horizon’s monthly rebalancing of positions (the overall equity weighting has not changed), and we will also touch upon trades executed at yesterday’s market close in the Sigma Portfolio (our real-life portfolio). On a surprising note, treasury allocation is no longer targeted following the recent poor performance.

Part of the pullback in stocks has materialized, but on a multi-asset class view, the US Dollar is still incredibly strong.

The gap between the 2 year performance of the US Dollar (UUP - white) and a multi-asset class portfolio (SPY + TLT + GLD + DBC) keeps widening. A man made currency is putting real assets to shame right now. Judging by the orange technical channel, there is quite a way to go before the move is exhausted. The only question that remains is: which is the safer alternative to the USD?

Before we attempt to answer that, let’s take a look at equities:

Even after the recent pullback, SPY is trading within the regression technical channel. As a consequence, our models will include equities in their targeting. Since SPY is no longer overbought, there are better odds of a trade triggering this week in Enterprise and Nostromo. All that’s needed is a positive MACD signal in a price range that is still within the technical channel (not below it - that is a STOP-LOSS zone). In other words, we will commit to more equity exposure if stocks manage a bounce right about now.

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 was aiming to close the position in commodities. A SELL signal has not been triggered and commodities have held up well. Now, this model is just aiming to reduce the position (not close it completely) on the next SELL signal.

TLT will no longer be initiated. It has been removed from target allocation due to the recent poor performance. The fundamental factors at play pushing rates higher (and treasuries lower) have prevailed, despite the hopeful recent rally.

Allocation to SPY is targeted at 90% of portfolio value. The only BUY signal that can trigger in this very narrow price channel is a MACD crossover (we are already on a SELL signal since yesterday). If the price bounces from here, that BUY signal will be found, and the trade will be executed.

Cash reserves (USD) continue to perform well, giving the model ample opportunity to allocate.

Nostromo Strategy

Nostromo, our tactical allocation model is sitting in 100 % cash this week.

Similar to Enterprise, it is waiting for BUY signals on equities (SPY).

In the commodities space, Nostromo is targeting DBA, an ETF focused on physical agricultural goods. I find this choice particularly interesting, since our own discretionary stock pick (CF) has performed very well and has earned raises from multiple analysts after their Q2 call. (CF is a fertilizer producer).

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 maintaining its 90% exposure to stocks. It will close the position in TLT at today’s market close - a move that is inspired by the targeting logic behind Enterprise.

As a secondary asset class, Horizon will initiate Commodities exposure through 2 ETFs: BAR (gold) and DBA (agricultural commodities).

The equities portfolio is being rebalanced on a monthly basis. It is comprised of 10 stocks, at 9% weight each:

ADM

ADP (initiated today)

ARLP (initiated today)

CLFD (initiated today)

CTVA (initiated today)

EQT (initiated today)

GPC

MCK (initiated today)

MUSA (initiated today)

SWAV (initiated today)

As part of the rebalancing process, the following positions are closed:

ENPH

GLPI

MLI

NXST

RFP

RS

SCI

XOM

The most important sector correlations for this portfolio are Industrials, Basic Materials and Financials, as shown in the table below. These are stocks that show the best relative performance, sharpe ratio and fundamental strength.

Takeaway

We are surprised by the resilience of commodities in front of a developing recessionary environment. Also surprising is our failed attempt to gain exposure to treasuries. This is one manual decision that will have to be unwound soon, since technicals did not confirm our allocation. There also appear to be mounting signs that the best plays in terms of equities revolve around “value” oriented stocks, related to basic materials, industrials and energy. As long as these particular sectors trade well, we will keep adding exposure slowly.

We will also rebalance the Sigma Portfolio today, according to a part of Horizon’s instructions. XOM and RS are previous positions that we are not going to close, due to the overall effect in our final portfolio. We like the direction Horizon is going, but Energy exposure is something I would overweight right now. Sector Correlations for positions in the Sigma Portfolio are found below.

Andrei Sota