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 an attempt 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 Q1, US equity markets held a steady bid although some sector rotation was felt as energy struggled while biotech rallied. After moving in fits and starts throughout 2016, the international equity markets showed solid demand. After five years of underperformance, it appears that money managers and advisors are taking the international allocation percentage up across both the emerging and developed markets. Despite negative headline risk, broad fixed income was fairly flat as the market digested the rapid jump in yields during the second half of 2016. Commodities were mixed to lower, with most rallies dissipating quickly. Traders and investors must be nimble to make money in the current commodity cycle. Current allocations and brief thoughts on each asset class are provided for your review.
Domestic Equities (70%): Allocation remained level vs. Q4 as our broad exposure remained well bid, particularly the Nasdaq 100 (QQQ). Our sector allocations include consumer discretionary, technology, biotech, materials, and a small energy piece, which is trying our patience. With some recent cautionary momentum indicators flashing yellow, we’ll look to buy on pullbacks rather than chasing these levels with additional capital. Always easier said than done!
International Equities (15%): The post-election weakness in this asset class was short-lived as demand returned in early January, driving many regions and countries to 52-week highs. It is encouraging that developed markets caught a bid, as they had been quite weak vs. emerging markets in 2016. With demand broadening out, we will continue to look for strong risk/reward entries, particularly in the developed markets, to dampen the volatility in our current EM allocation.
Fixed Income (0%): The Tactical Trend strategy does not currently have an allocation to fixed income, although, as discussed last quarter,we continue to find both absolute and relative value in Munis. With the equity market strength, convertibles have been fixed-income outperformers.
Commodities (0%):This continues to be a frustrating asset class, and we currently do not have an allocation. Energy and precious metals are reaching washed-out weekly momentum levels that have historically provided profitable snapback rally entries.
Cash (15%): At current yields, we hate to hold cash and continue to look for reasonable entry points to take up international and/or initiate a trade in the commodity space.