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 SPY closing within its regular trading channel on Monday, which would allow our models to target equities for exposure. Horizon will even buy a portfolio of stocks aggressively at today’s close, since it is blissfuly unaware of the hotter than expected inflation print that was just released. Enterprise and Nostromo will need to wait for BUY signals to occur before committing to any trades. Those BUY signals will need to occur with the assets trading above the Z-Score -1 level (lower technical trendline) in order to take effect.

In the end, we will explore our own positioning in the Sigma Portfolio. But for now, let’s take a look at Monday’s close, which informs the targeting logic for our strategies.

Of course, if we were to update the chart with today’s intra-day value (SPY is priced at 398.00 at the time of writing), it would no longer fit our allocation criteria. Horizon will stop-out all positions that it is going to buy at today’s close if by this time next week SPY will trade below the lower technical trendline.

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 targets SPY for a 90% weight position, if a BUY signal would trigger and SPY would be trading within its regression channel. At the moment, this looks unlikely.

A 15% position in DBC (commodity ETF) will also be bought on a BUY signal. This is much more likely to occur, since DBC is sitting at Z-Score -0.51, well within its regular trading channel.

Cash reserves (USD) are at the maximum allocation.

Nostromo Strategy

Nostromo, our tactical allocation model is starting the week with 100 % cash positioning.

Similar to Enterprise, it is waiting for BUY signals on commodities, but instead of trading DBC, it would select BAR (Physical Gold) due to volatility considerations.

On the equities front, instead of exposure to SPY, Nostromo prefers EEM (emerging markets ETF). The reasoning behind this choice is that EEM has held its own rather well in the last couple of months relative to the broad market, and would have better upside potential than SPY.

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 form a 10-stock portfolio and buy it at today’s close. It will allocate 9% to each position.

Horizon will be forced to stop out all equity exposure if by this time next week SPY will be trading below 409 (approximate level).

Commodities are also allocated, with a 15% weight. Like Nostromo, Horizon prefers Gold, due to reduced volatility.

Horizon’s stock portfolio is similar to the one in our real-life Sigma Portfolio:

ADM

ADP

ARLP

CTVA

EQT

GPC

LNTH

MCK

MUSA

SWAV

Below, the correlation table for Horizon’s portfolio reveals weighting towards Industrials, Basic Materials and Financials. In terms of factors, we find Value (IVE) and Momentum (MTUM) being favored.

Takeaway:

Where does that leave us in the real life Sigma Portfolio then? Keep in mind that our longer term goal is to converge on the “average” of all available strategies. At the moment, the average cash position across strategies is 65%, which is lower than the 72% available right now in the Sigma Portfolio, suggesting we should look to add 7% of equity exposure.

The only factor which looks like bottoming is EEM (emerging markets), that currently shows little downside potential. It would also serve to better diversify our holdings which are currently weighted toward Energy, Basic Materials and Industrials (see correlation table below). This addition would only be considered in the event SPY does not breach the support at 391 (our equity stop-loss) and contingent on a BUY signal triggering for EEM.

There is no change in the Sigma Portfolio today, since even accounting for a 3% drop after the hot inflation print, there’s no SELL signal which has been triggered.

Andrei Sota