Portfolio Rebalance / June 28 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.
Coming on the heels of a very positive week in the equity markets, Monday’s session saw a lot of consolidation. Our algorithmic models do not need to trade the aggressive rally in stocks, as the entire asset class is momentarily excluded from our allocation on account of a still very large divergence between the regression trendline and the current price (a Z-Score of -1.68 within a prior uptrend signifies too much risk). Instead, our models are trying to sort out the best alternatives, which, unsurprisingly reside in the Commodities and Gold areas of the market. The real twist comes from the fact that most commodities are seeing significant price pressures, as market participants try to square the inflationary and deflationary forces that are colliding in the geopolitical world arena. We are left with cash as the only real major asset class upon which all models agree.
SPY chart, reflecting exclusion logic for all equities in models.
Treasuries are not faring any better, with TLT not being able to convincingly recover from one of the worst bond bear markets in history. Present conditions may present a good long term buying opportunity in bonds, but our models prefer the certainty that comes with improved technical performance.
The bond bear market gives no respite - not even a “safety bid” is able to lift prices at the long end of the curve, in TLT.
When comparing an equally weighted Commodities + Gold + Equities + Bonds portfolio (orange) against Cash (white), we see a similar mirror image equity curve emerging. In an environment where rising interest rates make Cash more scarce, every other asset class is bound for underperformance. We are monitoring this trend week after week for an inflection point that would signal a regime change. But for now, the inverse correlation is very present and will most likely continue until we see a pivot from Central Banks around the world.
Chart showing different correlation regimes between Cash and every other asset class combined - latest inverse correlation regime started in March 2022.
Summing up, the conclusion is the same this week as the last: our algorithms are looking to buy what’s working (Gold, to a certain extent) and are selling what’s not working (Stocks and Treasuries). Commodities have started a decline and are currently vulnerable, so our models are prone to closing that position if they have it.
Enterprise Strategy
Enterprise, our most conservative model, only carries 25% 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 completely above target and the position will be closed on any signal. While previously waiting for a more opportune moment to increase exposure, our strategy has shifted targeting due to the very sharp pullback experienced by commodities. If the situation improves without triggering a sell-signal, the model will adjust higher most probably.
GLD is also in the mix, with a target exposure of 7%. This rather small position shall be filled on any buy signal.
Cash reserves (USD) stand at 75%, adequate to hedge volatility.
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. Plain and simple.
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. If there were any, allocation would go toward Gold.
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 reducing Gold exposure even further, as the bet on the safety trade has not worked out (with equities ripping higher, all defensives underperformed).
Horizon has no current plans to initiate a position in any other asset class. Cash remains the preferred hedge - in other words, the model expects losses to mount in the months that follow.
We will use all the models when composing the final allocation of the Sigma Portfolio.
Andrei Sota