Portfolio Rebalance / September 20
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 well below its regular trading channel, taking out our last stop level in the process. Horizon got stopped out of all equity positions, as expected - a brutal, but entirely foreseeable outcome. Enterprise and Nostromo ride out volatility by staying all in cash. If they would buy anything, it would be commodities, but only just (8%). Not only is this week’s positioning mostly in cash, but the targeting logic behind all the models is also very defensive.
At the end of the article, we will explore our own positioning in the Sigma Portfolio. The main driver of the mostly-cash allocation remains the exceptional performance of the US Dollar, that eclipses every other asset class, as shown below:
The US Dollar (white: UUP) vs a combined asset class portfolio (orange: SPY + TLT + GLD + DBC)
The combined asset class portfolio is hovering just above the lower technical trendline, with the US Dollar going from strength to strength. This scenario elicits our trend-following system to simply follow the most profitable trend - and that is CASH at the moment, courtesy of the Fed’s financial tightening campaign.
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 DBC (commodity ETF) for an 8% allocation. A BUY signal is likely to occur on a MACD crossover. We note that the reduced weight as far as targeting is concerned comes as a result of weakening technicals for commodities - notably, the ONLY asset class that is investible at the moment.
Cash reserves (USD) are at the maximum allocation.
Nostromo Strategy
Nostromo, our tactical allocation model is starting the week with 100 % cash positioning. No surprises here.
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, as well as UNG (nat gas ETF) due to a decent and buyable pullback.
Should a BUY signal occur on any of these ETFs, Nostromo would initiate a long position. Neither allocation would be large though, with both positions getting a total of 8% of the portfolio value.
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, just got stopped out of all equity positions. It will be selling ALL stocks at today’s close.
As equities are missing from the allocation, Horizon will default to Nostromo’s targeted trades. Because there are no daily signals used in this strategy, Horizon will simply execute the orders at market close (as displayed).
On that note, all display issues and daily newsletter occasional bugs have been solved!
Horizon will be buying commodities, split between BAR (gold ETF - 6.79% weight) and UNG (nat gas ETF - 1.26% weight).
Takeaway:
In the Sigma Portfolio, we are looking to reduce equity risk exposure to 0% (be completely hedged in a long-short book). We are maintaining exposure to commodity-related stocks, as the pullback in nat gas and oil (plus other commodities in general) looks overdone.
If the market would pull off a reasonable rally from oversold conditions (up to SPY 393 - 395), and fail - more hedges will be deployed.
If Friday’s close brings another week of losses for the market (making our short positions profitable), hedges will also be increased.
As previously mentioned, we are aiming to converge this portfolio to the best parts of our automated models. The best part looks to be CASH right now, and the average allocation to the dollar between all models sits at a whopping 97%. This leaves us little wiggle room, and argues for using every opportunity to increase hedges.
Andrei Sota