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. Horizon has given us a bit of difficulty in displaying the most recent trades this time around, but rest assured this is only a display issue and actual performance is not affected.

Same as last week, 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.

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.

The US Dollar has proven to be a macro force to be reckoned with. It has now almost closed the performance gap against a multi-asset class portfolio. Never mind the fact that the mixed portfolio is close to the limits of overall allocation, running into the -1 Z-Score boundary (lower technical trendline). If it weren’t for the influence of commodities, all of our strategies would be in 100% cash. The only trade that appears to be working besides the USD is betting on sustained inflation via exposure to physical goods. We are also speculating (ie - front running our own system) that treasuries will pick up in terms of performance in the second half of the year, as yields have priced in all the possible negative outcomes. Treasuries might also work in a “flight to safety” scenario, where all else fails.

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. Equities seem to form an intermediate bottoming pattern at -1.76 standard deviations below their regression line, while gold exemplifies the reason we use stop-losses in our models. Gold has performed poorly as an inflation hedge, to say the least. Commodities (DBC) are faring much better, on an upward sloping channel, not overbought and holding the 200-day DMA. Our systems are treating this pullback as a buying opportunity. Of course, if we are to have a deflationary, deep recession (as everybody and their uncle seem convinced we are going to get), commodities will get hammered as well. However, our discipline states that we need to maintain a degree of exposure to this asset class for the time being.

With that being said, not all commodities are created equal. We compare oil, natural gas, lithium and gold to the benchmark DBC ETF.

I personally view oil as the most attractive commodity out there from a technical point of view. Lithium would be my second pick besides oil. That is why, in the Sigma Portfolio, I chose energy companies as alternative plays on the same theme. Let’s now take a look at each automated 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.

Commodities targeting has been significantly diminished. The strategy is aiming to reduce exposure to commodities up to 15% of overall allocation from the current 24%

The position in commodities will be sold on the first available 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 has carefully added to commodities exposure, initiating starter positions in oil and natural gas (5% in total). A rebound thesis could also make fundamental sense in the broader commodities sector.

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 85.33% cash, moving very slowly out of USD. 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 finished adding a 10% core position in treasuries, using a 3% allowance to add energy exposure and a market hedge. We are keeping commodities at 6% until a better opportunity to offload them emerges. Cash is still our number 1 position, at 83%.

Andrei Sota