Portfolio Rebalance / October 18
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, our systems are increasing target exposure to the commodities sector significantly, as a short squeeze is gripping the equities market. The play here is to try and speculate possible weakness resulting from the highly overbought condition of the US Dollar (pictured below).
If the experience from this year tells us anything, it is that the US Dollar has become negatively correlated to every asset class. A lower US Dollar will lift both equities, commodities and gold. The reason our systems are choosing commodities for allocation is that they are still trading within a positive regression channel.
The US Dollar (UUP) shown trading at the top of its regression channel, but no longer overbought
The way our systems choose to speculate a short to medium term USD weakness varies for each model.
However, the prevailing message from this week’s rebalancing remains: lower cash allocations are warranted for the time being.
Enterprise Strategy
Enterprise, our most conservative model, holds 15% exposure to commodities, and 85% cash.
Since this model only trades 4 asset class ETFs, we use it to judge overall portfolio positioning.
The strategy will aim to increase exposure to commodities on the next available BUY signal, from 15% up to 45% of portfolio NAV. Since commodities are not currently oversold, and DBC is trading in positive MACD territory, some weakness or consolidation is necessary before a signal will trigger.
Cash reserves (USD) are at 85%, a very defensive number for the time being.
Nostromo Strategy
Nostromo, our tactical allocation model is starting the week with 100 % cash positioning.
The strategy will look to buy gold (BAR) on the next available BUY signal.
This is likely to occur in the following trading week, as the ETF is currently trading with a negative MACD signal (a positive crossover has a fair chance of occurring).
The strategy will also deploy up to 21% of portfolio NAV to agricultural commodities via DBA (also on a signal that is likely to trigger soon).
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 rebalance commodities exposure to 45% of overall portfolio value, and split this allocation between BAR (Gold) and DBA (agricultural commodities).
Favoring a risk-taking approach, Horizon will not wait for any other signal and simply order the increase at today’s close.
Takeaway:
3 weeks ago 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.”
While that view is still the prevailing one in terms of medium term portfolio strategy, an increasing number of technical signals point to an epic short squeeze (coupled with USD weakness) that could be enough to make investors think “the bull market is back”. That level could be reached in the following 2 weeks, with the SPY trading close to or above its 50-day Moving Average (around 391 currently). Chasing such a rally is the speculative option in the short term, but any trading done in this direction should be kept on a very short leash.
Andrei Sota