Well, that didn’t take long! The secondary indicators (sentiment) we mentioned as a concern in our 2017 year-end commentary (see Tactical Trend, Q4 2017) proved to be a bit too much for the equity markets to digest during Q1. The extreme bullish readings in late December and early January were a warning that capital had already been committed and a near-term pullback was possible. The timing of these sentiment indicators is not precise and is used only to add color to primary market-trend and relative-strength analysis. The short-term indicators tend to be self-correcting as greed quickly turns to fear and the market creates new opportunities.
As a strategy that attempts to identify strengths and weaknesses among the primary asset classes, Tactical Trend has a flexible asset allocation approach. The asset classes we analyze and allocate to can include US equities, international equities, fixed income, commodities, and cash. Within the selected asset classes, we use trend and relative-strength analysis to measure risk vs. reward and determine capital allocations. While no strategy is perfect, this analysis tends to highlight broad market changes, and it focuses our attention on where capital is being treated best. Although the strategy raised cash during Q1, our favored asset classes have not changed vs. last quarter. Domestic equity and international equity remain our preferred asset classes, and we view the current market volatility as normal from a historical trading perspective. The past 24 months of little downside volatility have perhaps heightened the emotional response to current action. Please review our current strategy allocations below, but realize that positions can and will change as risk levels change.
US Equity: (50%) Broad market exposure through QQQ & RSP. We would look to add Banks on further weakness. Our primary concern is weakness in Basic Materials (XLB).
International Equity: (30%) 50/50 exposure to developed vs. emerging with a tilt towards Asia in overall weighting. We would look to add to emerging markets (VWO) on further weakness in a solid long-term trend.
Fixed Income: (0%) No position currently, although muni spreads are attractive.
Commodities: (0%) No position currently, but oil trades well and is the midst of a pullback. It may be attractive on further weakness, as we tend to buy commodities on pullbacks vs. runs.
Cash: (20%) Up from 7% at year-end. Represents capital raised from Consumer Discretionary (VCR) in early 2018.
Matthew C. McAleer
Managing Director & Portfolio Manager
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