Portfolio Rebalance / July 12 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.
We have put up Q2 performance figures for all automated strategies - check them out here. An analysis will follow soon, but suffice to say for now that all models are experiencing record lows in short term performance and drawdown. Since 3 out of 5 asset classes are deemed un-investible (equities, treasuries and gold), our strategies have nowhere to allocate but commodities and cash. This also means that position sizing is becoming increasingly constrained, as higher than usual volatility is pressuring our parity system to scale down risk.
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). With the USD making new decade highs, keeping an eye on this chart will prove valuable.
Chart showing the closing performance gap between Cash and every other asset class combined
We have witnessed a modest jump in the combined performance of non-cash assets, but nothing that would indicate a reversal of the current bearish trend. As indicated by the bar on the right, conditions are not exactly “oversold” just yet. We expect more volatility after Wednesday’s inflation data is published. If the numbers come in hot and rate-hike expectations jump, more USD strength is expected and it would certainly bode worse for every other asset class. Conversely, if inflation data is soft, a combined portfolio should perform well.
Let’s take a quick look at every asset class that makes up our orange line in the chart above and see where we stand (Asset Class Overview).
SPY and GLD are both trading below their technical channels, with Z-Scores below -1. This automatically disqualifies all equities and precious metals from receiving an allocation from our system. Commodities (DBC) are faring much better, on an upward sloping channel, not overbought even after the recent corrective action. If anything, that has proved to be a buying opportunity to a certain extent. Treasuries are the rebound play here, as the bear market has priced in a lot of possible negative outcomes.
The chart below shows the percentage performance of these ETFs. We have identified March 07 as a fulcrum point from where performance seems to drop off for everything except cash. If this is a brand new bull market for the US Dollar, then it is a relatively young one and may last quite a bit longer.
March 07, a turning point for the USD relative to everything else?
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 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.
There is no significant change in either targeting or allocation this week for the model.
The position in commodities will be reduced on the first sell signal. That signal will most likely have to wait, since DBC is still recovering from a deep and brutal sell-off. A portion of the drop still needs to be retraced.
Cash reserves (USD) continue to keep this strategy out of trouble with a hefty 76% 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 (USD) is King, plain and simple.
There has been no major change in targeting or allocation for the strategy this week. Nostromo is carefully adding to commodities exposure, initiating starter positions in oil and natural gas. A rebound thesis could also make fundamental sense.
The model would be looking to also add exposure to Gold as a commodity play, if a buy signal triggers.
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.
As is the case with all of the other models, Horizon does not present us with major changes. For such an aggressive strategy, the amount of cash on the books is telling of the environment we are facing.
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. Models average 86.33% cash, which is lower than last week, but still very high. A 100% cash position is the most bearish these strategies can get. 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 have begun adding treasuries to the mix, reducing Gold, and instead of a bet on oil - we have used that 3% allowance to buy positions in energy companies. The nat gas component is still under consideration, but we will most likely not make any changes until after we get a better understanding of inflation numbers
Andrei Sota