Portfolio Rebalance / June 07 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.
On this day, we notice the final phase of an important transition in terms of asset class allocation. The traditional stocks-bonds portfolio is phased out in all models, while commodities regain their place as a major class, alongside with cash. You can clearly see why below (200 day performance of all major asset classes).
It’s easy to spot what’s working and what’s not. Simply put, momentum and trend following form the basis of any stock market strategy worth its salt. Buy more of what works and sell what doesn’t. Sometimes, it’s as easy as that, and that is where we are now.
Commodities (DBC) and gold (GLD) are the only major ETFs working (with a positive return). Equities and treasuries are not.
Let’s see where each of our models stand on rebalancing day.
Enterprise Strategy
Enterprise, our most conservative model, only carries 27% 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 is slightly below target and will be bought on any signal. The strategy is aiming to adjust the position, and use some weakness in the commodities space in order to add to exposure.
GLD is also in the mix, with a targeted 22% of overall allocation. It would need to detect either a rebound from recent weakness, or (more likely) a continuation of recent momentum, in order to confirm the positive trend.
Cash reserves (USD) stand at 73%, adequate to hedge volatility, even after buying the GLD position.
Nostromo Strategy
Nostromo is sitting in cash 100%. It got stopped out of all positions last week and is waiting for an opportune time to gain exposure to DBC and GLD.
What is critical to note here is that under normal circumstances, Nostromo would run a comparison algorithm within each asset class, making for a more granular approach. It has conceded that there are no better detailed alternatives than the major ETFs when comparing DBC to other specific commodity ETFs (like USO) and GLD when comparing it to other precious metals ETFs (like silver or lithium).
Conclusion:
1. High volatility is expected again, and a more granular approach would up the risk of the strategy to unacceptable levels.
2. DBC enters this portfolio allocation for the first time this year, completely replacing any other equity holding.
We have now completed the transition from a stock-bond portfolio to a gold-commodities-cash portfolio.
Horizon Strategy
Horizon is our most aggressive model. It is always looking to gain exposure before the other models have a chance to trigger trades.
This week, Horizon is essentially at the point where both Enterprise and Nostromo want to be in the near future. I like this portfolio and I will steer the Sigma Portfolio in the same direction as well, looking to offload treasuries and equities at the right time.
Cash is at 35% of allocation, making for a nice volatility hedge.
We are starting to see some alignment within models, which is usually a good sign for future returns.
Andrei Sota