From the desk of Willie Delwiche.

Key Takeaways:

• Despite macro concerns, evidence tilts toward opportunity
• Energy sector strength benefitting active asset allocators  
• Country-level leadership favors dirty energy over clean plays.

A recently published article in the Wall Street Journal reviews "5 reasons why stocks might be weaker in 2022." Mostly it's a list of macro concerns, from liquidity constraints to slowing profit growth to elevated valuations. I am sympathetic to a number of them - to a greater or lesser extent they factor into my consideration of the weight evidence. We need to balance our thinking about various things that could happen against an assessment of what is happening. As any sailor might attest, there can be a big difference between risks on the horizon and conditions that need to be navigated. You don't make much progress if you drop the sail the moment there are storm clouds in the distance. There may be a time to reckon with some (or all) of those clouds at some point, but as we have been discussing in recent...

From the desk of Willie Delwiche.

We’ve made some changes to our ASC+Plus Dynamic Portfolios. 

With the weight of the evidence turning more bullish, we have increased our equity exposure in the cyclical and tactical opportunity portfolios. 

Within these portfolios we have also moved away from equity areas that are struggling to participate in the rally and re-focused exposure on areas that are experiencing upside momentum.

From the desk of Willie Delwiche.

With our latest Weight of the Evidence Dashboard improving and now signaling a neutral stance, we have put cash to work across our portfolios to reflect a more balanced approach.

From the desk of Willie Delwiche.

Key Takeaways:

• • Volatility shifts affect investor risk tolerances
  • Portfolios positioning reflects cautious message from weight of the evidence.
  • Watching to see if evidence argues for increasing exposure or getting more defensive

When volatility picks up, there can be a natural desire to review and reconsider or reduce all long exposure. This impulse reflects the reality that for many, risk tolerance is higher in periods of strength than in periods of weakness. Our view is that proactive risk management can lead to better outcomes than reactionary decision-making. 

That is a major reason why we spend so much time reviewing and discussing the weight of the evidence. We don't know what the future will hold, but we can increase the odds of looking in the right direction by watching where the wind is blowing....

From the desk of Willie Delwiche.

As we've still yet to see a decisive shift to a risk-on environment, caution remains the general guiding principle for this market. At the same time, there are opportunities in crypto that we'd like to take advantage of. 

In the Cyclical portfolio, we’re shifting domestic equity exposure from small-caps (IJR) to mid-caps (IJH). Small-caps have been stuck below a now-falling 50-day average for nearly two months, and our industry group rankings show small-cap groups losing relative strength versus both large-caps and mid-caps.

Two things to note in the Tactical Opportunity portfolio update - a change that is being made and one that is not being made. First, we’re putting some cash to work by adding a 5% position to Ethereum (ETHE). Breakouts are being seen across the crypto space, and we want to follow that strength. Second, we’re keeping our exposure to commodities (DBC) for now. We’re giving it the benefit of the doubt, as the longer-term up-trend remains intact.

From the desk of Willie Delwiche.

The overall weight of evidence continues to argue for caution and we have yet to see a decisive shift toward a risk-on environment. But we have made some changes to our dynamic portfolios to stay in harmony with the shifting trends within the equity market.

In the Cyclical portfolio we’ve thrown in the towel on our Energy sector exposure and are positioning to benefit from the resumption of the uptrend on bond yields. Financials and other cyclical value areas appear poised for another round of leadership.

In the Tactical Opportunity portfolio we are putting some of our cash to work (though continue to have a healthy amount on the sidelines - remember cash is an asset class). We are adding to strength within our domestic equity exposure and see an opportunity to add global exposure at a time when many foreign ETF have already been struggling with overhead supply. 

From the desk of Willie Delwiche.

Key Takeaways:

• Breadth downgraded to neutral as trends in the US and globally weaken
• Absence of breadth thrust regime weighs on a market struggling for direction
• Reducing equity exposure in Cyclical and Tactical Opportunity portfolios

The divergences between what has been seen in the popular averages and what is happening beneath the surface have become significant enough that we have moved breadth to neutral in our weight of the evidence framework. This leaves the scales tilted away from opportunity and toward risk. 

The most recent breadth thrust regime expired in early June and since then the percentage of global markets trading above their 50-day averages has fallen from the upper 80’s to now just 20%. One-third of the markets are not even above their 200-day averages. US industry group trends have also faltered. The percentage trading above their 10-week averages is breaking down while the percentage making new 13-...

From the desk of Willie Delwiche.

A DYNAMIC APPROACH TO PORTFOLIO MANAGEMENT

The number one question I have gotten from financial advisors over the course of two-plus decades in this business is “What should I do now?” The answer can sometimes be “nothing”, but it cannot always be “nothing”. Dynamic portfolio management is about finding the right balance between following existing trends and adjusting as necessary to new information. To do this we need to have a good grasp of time frames. Every investor has a timeframe. Every system has a timeframe. Finding harmony between the two helps provide the appropriate balance between action and inaction.

We can think about this in terms of navigation and one of my favorite investing metaphors: sailing. We wouldn’t want to go on a journey with a captain who fiddles with the rigging so much that he cannot hold the wind. We also wouldn’t want to go sailing with one who doesn’t even try to catch the wind in the first place. We want to go sailing with a captain who observes where the wind is actually blowing and positions the boat accordingly. Even once the wind fills the sails and there is...