Recognizing strengths and weaknesses among primary asset classes is the core goal of our Tactical Trend strategy. The strategy seeks to identify relative strength and trend strength in order to allocate capital to the strongest asset classes while underweighting or eliminating exposure to the weaker classes. The asset classes tracked include US equities, international equities, fixed income, commodities, and cash.
Through Q2, US and International equity markets have remained strong, with each minor pullback met by strong demand. While the domestic technology and consumer discretionary sectors continue to trade well, the broadening strength in biotech, financials, and industrials has been particularly impressive. Participation has also been broad in the international markets as Europe rallied strongly in Q2 and enabled developed markets to catch up with emerging-market strength from earlier this year. The recent relative strength of the foreign equity markets vs. the US markets is a trade that may have some legs, as the aggressive global easing action of 2015–16 is a page out of the Fed policy book from earlier this decade. Maybe that’s too simple a thought, but sometimes it pays to not outthink supply and demand. There will certainly be runs and drawdowns in the global equity markets, but we cannot ignore how powerfully the US equity market responded to 0% interest rates.
Although Tactical Trend does not currently own a fixed-income allocation, the bond market is always in the spotlight from an overall trading standpoint. Cumberland entered 2017 with the idea that rates had overdone it to the upside and could be bought – especially Munis at a 125% spread vs. Treasuries. Ring the bell, we’ll take it, as the 10-yr. Treasury has drifted back down to the 2.15% level. I would define our posture as “demanding” and “particular” at current levels.
Commodities continue to struggle and are not currently owned in Tactical Trend. From a trading standpoint, the only positive is that some energy and agriculture markets are reaching negative momentum readings that have coincided with rally attempts in the past. We track these readings weekly and have target levels where selling can become exhausted and begin to dry up. We have currently raised some cash from our June mid-cap equity sale to target any weakness that develops in international equities throughout Q3 or extreme oversold levels in commodities.
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Cumberland Advisors Market Commentaries offer insights and analysis on upcoming, important economic issues that potentially impact global financial markets. Our team shares their thinking on global economic developments, market news and other factors that often influence investment opportunities and strategies.
