Portfolio Rebalance / July 06 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. We analyze these model portfolios as something that a “machine would do”, then decide when and how to incorporate their positioning within the manually directed Sigma Portfolio.
Next week, we will also be releasing Q2 performance figures for all strategies. Spoiler Alert: 3/4 strategies outperformed the market, but got negative returns. It’s been quite an exercise in managing frustration as well as positions on our side as well. It seems like everything not cash is performing very poorly, while we are running long-only books. The best we can do in a bear market is manage risk, size positions and aim to lose less than the other guy. In the end, survival is the goal, as things will surely start looking up at some point.
That being said, let’s take a look at one of the most featured charts within this article, that compares an equally weighted Commodities + Gold + Equities + Bonds portfolio (orange) against Cash (white).
Chart showing the closing performance gap between Cash and every other asset class combined
With the latest crash in commodity prices, the gap between a combined asset class portfolio and the US Dollar is looking ready to close. No wonder then that the preferred position of our models combined is CASH (average size is 87.33% of portfolio value).
The only asset class that I find interesting for the second half of the year is long term treasuries (TLT), which appear to be forming a bottom. Fundamentally, the argument of owning bonds resides in deflationary expectations starting to take hold in 2023 when the Fed is expected to pivot in a dovish manner. Not only that, but unlike stocks, bonds provide limited downside in a credit-based economy, as yields cannot rise above a certain threshold without chocking economic output. Strategies won’t buy TLT yet, so by initiating a position, I would effectively be front running the system. Bearing in mind the overall risk constraints, this is something I’m willing to do in the Sigma Portfolio.
Beside the fundamental case of owning bonds, there is a technical case as well, as a bottom seems to be put in place.
Let’s now take a look at each strategy and see how portfolio positioning and targeting has evolved from last week.
Enterprise Strategy
Enterprise, our most conservative model, carries 23% 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.
DBC allocation has fallen from the previous value of 25% from last week strictly because of the position’s underperformance. There have been no trades executed in the meantime.
What is new in today’s rebalance is the targeting value for DBC. Last week, the strategy aimed to close the position in commodities completely (unfortunately, no trading sell signal was given, only a targeting instruction, and the model ended up holding throughout the commodities crash).
But after today’s rebalance, notice that a sell signal would only partially close the DBC position. This is because a lot of risk has evaporated from the commodity complex with the recent repricing.
Gold used to be targeted for exposure last week. No buy signal has been encountered and now Gold is firmly out of the picture as part of an asset class allocation.
Cash reserves (USD) continue to keep this strategy out of trouble with a hefty 77% position.
Nostromo Strategy
Our cash-loving Nostromo strategy has managed to successfully navigate the current macro environment. Quite simply, there has been no better asset class as of late, and this model has taken full advantage of it. Cash is King, plain and simple.
Exposure to Gold as an asset class has been taken out of the targeting equation this week. Instead, the model aims to find buy signals for oil (to the tune of a 3% exposure), and Gold in the place of other commodities (I know this may be confusing, but Gold is the only instrument trade-able within the broader commodity complex and outright as its own asset class).
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 always looking to gain exposure before the other models have a chance to trigger trades.
This week, Horizon is acting like a Nostromo that had all its orders triggered and filled. This strategy should create a stock portfolio in “regular” times, but in bear markets it is set to default to the allocation provided by the other models. It does not wait for buy or sell triggers, it just rebalances weekly.
At the end of today’s session, Horizon will buy oil (USO, 3.64% position), and fill the rest up to 15% allocation with Gold (BAR ETF).
We will use all the models when composing the final allocation of the Sigma Portfolio.
Takeaway
We are facing a tough environment for long-only strategies. Due to high cross-asset volatility and negative returns, algorithms are suggesting limiting risk via ever smaller (and safer) position sizing. In the Sigma Portfolio, we will add treasuries to the mix, reduce Gold, and instead of a bet on oil - use that 3% allowance to buy positions in energy companies.
Andrei Sota