Portfolio Rebalance / June 14 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.
The Post-Inflation rebalance doesn’t bring many moves to the table just yet. We are still in the phase where our strategies are balancing Gold, Commodities and Cash exposure. First off, let’s review the overall asset class performance:
In light of a more hawkish fed and implied 75bps of hiking to be done tomorrow, every major asset class has sold off, as the only real safety is Cash. The most pronounced moves are in Stocks and Commodities, while Gold and Treasuries are weathering the storm better. However, an equal weight portfolio comprised of all the above mentioned asset classes would have fared pretty bad, as shown in the chart below. It is now sitting at recent lows vs the US Dollar.
Another way of looking at asset class relative performance is through the lens of the distance from near and long term moving averages, expressed in standard deviations. This is what we call a “Sigma Score” and it measures how extended (or unusual) the recent price is, on a scale of -3 to 3. Any score above 1.8 or below -1.8 is deemed excessive. We can see that SPY and TLT are both significantly deviated to the downside, while DBC and GLD are trading in a more “normal” range.
The risk range extension is another way of expressing the same story. To sum up, our algorithms are buying what’s working (Commodities and Gold) and are selling what’s not working (Stocks and Treasuries). While conter-trend bounces are always part of the mix, we believe this trend is set to continue. Let’s review our m
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 significantly adjust the position, up to 43%, and use some weakness in the commodities space in order to add to exposure.
GLD is also in the mix, but the target exposure is just 7% this week. A buy signal would therefore trigger the addition of a modest position.
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 has once again swapped physical gold rather than use commodities outright to play the weak USD thesis.
For now, this model tells us that it’s best to remain neutral in our approach, as there are no buy triggers on the horizon.
Horizon Strategy
Speaking of 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 essentially at the point where both Enterprise and Nostromo want to be in the near future. This portfolio carries more cash this week than the past one.
At precisely 50% of allocation, cash is there to cushion the excess volatility, as it has built up in financial markets. Even automatic models sense that against a backdrop of indiscriminate selling, there is no other safe harbor for your capital.
Andrei Sota