Portfolio Rebalance / October 04
Observations on Signal Sigma Strategies weekly positioning and transactions
Tuesday is the day when all of our strategies rebalance their asset class holding weights. This week features a solid bounce from oversold conditions that generated a series of BUY signals across different ETFs (check out our daily newsletter). Horizon, our most aggressive strategy will attempt to trade commodities from the long side, while the other models keep positioning all in cash.
With equities still under a lot of pressure, there is now a trade-able bottom put in, with support at SPY 360. For short term traders, there is at least a 100-point upside for the broad market in the next couple of weeks. To put it another way, SPY could gain around 9% on a retracement to the 50-day moving average and 14% in case it fully retraces to the 200-day moving average. These kinds of price moves are not at all uncommon.
For medium and long term focused investors, the current rally should be used to reduce exposure. In the Sigma Portfolio, we are aiming to get to a market neutral allocation first, on the assumption that SPY reaches our price target of 385-400 on this leg.
We still remain in an environment where it’s every asset class v.s. the US Dollar. As equities and virtually every asset class have upside to their most important moving averages, the US Dollar (UUP) has downside, as pictured below:
The US Dollar (white: UUP) vs a combined asset class portfolio (orange: SPY + TLT + GLD + DBC)
The combined asset class portfolio (orange) is inversely correlated to the US Dollar in a very obvious manner. The Overbought / Oversold indicator is now sitting at 25/100 (versus a reading of 0/100 last week).
A move from extreme oversold (a score of 15 or below) to anything above 15 is what we consider to be a textbook bounce. The secret to trading bounces however is timing the trade so that your P/L is still positive by the time the move ends.
Don’t mistake this move for the resumption of a bull market. It’s likely not the case right now. However, our aggressive strategy does what it’s programed to do and it’s buying the only asset class that still meets our allocation criteria: commodities.
Let’s observe the changes in all of our models.
Enterprise Strategy
Enterprise, our most conservative model, is 100% allocated to cash.
Since this model only trades 4 asset class ETFs, we use it to judge overall portfolio positioning.
The strategy will buy commodities on the next BUY signal up to 15% of overall portfolio value. This signal could come as soon as tomorrow, if current prices will hold by the end of the session.
Cash reserves (USD) are at the maximum allocation right now, and will not drop below 75% for the moment.
Nostromo Strategy
Nostromo, our tactical allocation model is starting the week with 100 % cash positioning.
The strategy will look to buy agriculture commodities (DBA) and gold (BAR) on the next available BUY signals.
It has somewhat “missed the boat” on BAR, since a MACD cross just occured 3 sessions ago, and the ETF is no longer oversold (so as to trade a bounce).
DBA, on the other hand is sitting at trendline support and about to trigger a MACD BUY signal if it holds this level.
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, will attempt to trade commodities from the long side again.
Favoring a risk-taking approach, Horizon will not wait for any other signal and simply allocate toward BAR and DBA at the end of the session.
Takeaway:
Last week we wrote:
“In the Sigma Portfolio, we are looking to reduce equity risk exposure to 0% (be completely hedged in a long-short book). Furthermore, on a rally that takes the combined asset classes to overbought conditions (and the US Dollar to oversold) we will aim to switch to a net-short allocation.”
There is no change in our overall thinking. However, given the abundance of BUY signals that we got yesterday, we are inclined to cover one of our short positions today. This will temporarily INCREASE our exposure by about 5%.
The plan is to re-hedge once our price target is reached (385-400 on SPY, or the 50-day moving average). This increased exposure will not last for more than 20 trading days starting from today’s session.
Andrei Sota