It remains a risk off environment. With the indexes breaking down (S&P 500 at lowest level of the year and Value Line Geometric Index back to where it was in the Summer of 2017) and selling pressure intensifying, we are trimming our equity exposure. This helps increase our liquidity (which tends to be a scarce and valuable asset in periods of turmoil) and leaves us well positioned to lean into opportunity when our bull market re-birth checklist improves.
A risk off environment persists. Leadership areas are coming under pressure as market correlations rise (as they typically do in periods of stress). We are reducing our exposure and move to the sidelines to ride out this period of volatility.
Participating in strength so far in 2022 provides us with some operational flexibility in our Dynamic Portfolios. But in a market with relatively narrow participation, it can be challenging to find ways to move from strength to strength without becoming too concentrated. That said, we are reducing exposure to some of the strongest areas of the market – taking gains more than expecting weakness. We are finding opportunities to maintain our current exposure to the market, increase our diversification and remain consistent with the message of caution coming from our risk indicators and the weight of the evidence. This remains an environment that favors a dynamic over passive approach and one in which being tactical and cyclical enhance strategic exposure.
Our dynamic portfolio update discusses some changes we’ve made to our holdings and takes a look at how the portfolios are faring in a period of heightened volatility for static 60/40 portfolios. We re-positioned our foreign equity exposure to move into areas of strength and adjusted our cash levels to stay in harmony with our risk indicators and the overall message from the weight of the evidence.
With equity market trends in the US deteriorating, we have reduced domestic equity exposure in our Cyclical and Tactical Portfolios. We are adding equity exposure where we are seeing strength overseas and remembering that asset allocation decisions don’t just come down to stocks vs bonds, but include commodities and cash as well.
The cyclical weight of the evidence tilts toward opportunity.
Our tactical risk management model remains constructive even in the absence of a breadth thrust (though such an event would certainly help the bullish case).
While not doing much from an asset class perspective, we have made some changes in our dynamic portfolios. Highlights include:
- Getting more constructive on Europe and the new highs coming from the UK.
- Shortening the duration of our fixed income holdings as we start to upward pressure on interest rates..
- Making a clean (Technology-related) to dirty (Materials-related) rotation in our Tactical Opportunity portfolio.
Overall we continue to position these portfolios not for what could or should happen but consistent with the message of the market and an eye on what is happening.
With volatility on the rise and increased evidence of fissures beneath the surface of the market, we have reduced equity exposure in our Tactical Opportunity portfolio. The deterioration at this point has not been significant enough to warrant reducing equity exposure in our Cyclical portfolio, though we have made some changes there as well to stay in harmony with the relative leadership trends we are seeing both in the US and globally.