DAY HAGAN STRATEGY UPDATE
DAY HAGAN TACTICAL ALLOCATION STRATEGY UPDATE DECEMBER 2016
General commentary regarding the financial markets and an update regarding the Day Hagan Tactical Allocation Strategy.
December 5, 2016
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At the end of November, the Day Hagan Tactical Allocation strategy (DHTA) was 64.7 percent invested in equity and equity alternatives, 9.7 percent in fixed income and 25.6 percent in cash and cash alternatives. (Note: The fixed income and cash allocations reflect holdings within the exchange-traded funds we own. Therefore, individuals may look at their portfolios and see slightly different stock/bond/cash allocations.)
Based on the aforementioned allocation, DHTA continues to maintain a neutral to mildly bullish equity exposure. Further, we continued to underweight fixed income and overweight cash as our bond versus cash models continue to emphasize the underweighting of bonds as longer-term interest rate risks remain elevated.
From a broader equity asset class perspective, DHTA favors U.S. equities over international equities, is neutral on value versus growth and slightly favors large capitalization over small capitalization stocks. From a sector perspective, the strategy’s top three holdings are Financial Services, Industrials and Technology. The sectors with the least exposure are Communication Services, Utilities, and Basic Materials, each with less than 4 percent overall exposure.
During the month we exited half of our U.S. Small Cap Value allocation and reallocated that capital to Large U.S. Cap Value equities. We accomplished this by selling a portion of our iShares Russell 2000 Value ETF (symbol: IWN) position and purchasing more of the iShares Russell 1000 Value ETF (symbol: IWD).
At the time, we noted that smaller capitalization value stocks (IWN ETF) had been losing ground to larger cap value stocks (IWD ETF) as valuation differentials had moved in favor of large cap. Currently, the IWN ETF cash flow yield is 6.3 percent versus the IWD ETF cash flow yield of 7.4 percent, while the 0.4 percent dividend yield for the IWN pales in comparison to the 1.8 percent dividend on the IWD.
While we had previously been overweight small cap value versus large cap value, the uncertainty around the elections and the waning international growth evidenced toward the end of October showed that taking a more defensive stance by increasing the allocation to large cap stocks versus smaller cap stocks was appropriate.
We also exited our position in the Consumer Discretionary Sector ETF (XLY), as trend and relative strength model support had begun to wane. We reallocated those funds to the Vanguard FTSE Europe ETF (VGK). From a valuation perspective, the VGK ETF’s cash flow yield was 9.01 percent, well above its 3-year median of 5.76 percent, and also indicates a current dividend yield of 2.83 percent. We would also note that based on a Purchasing Power Parity calculation by NDR, the dollar was approximately 11.3 percent overvalued versus the euro. Brexit and other EU shocks remain risks that we are watching closely.
Toward mid-month, we also added small positions in the iShares 20-year Treasury Bond ETF (approximately ~3.5 percent, symbol: TLT) and the SPDR Gold ETF (approximately ~1.5 percent, symbol: GLD). Both trades were initiated to offset equity risk should the equity markets have stalled or reversed lower. We viewed these positions as trades rather than long-term holdings and elected to risk-manage them by attaching tight stop losses. On 12/2/2016, we were stopped out of the TLT holding and are currently holding that capital in our cash account.
Our models and indicators remain neutral to slightly bullish for the intermediate- and longer-term perspectives. We continue to favor the U.S. equities over international equities. With regard to capitalization and styles, we remain neutral. We are maintaining our low duration bond holdings and are overweight cash. Like last month, our models’ message is that this isn’t the time to be overly bearish (negative), nor is it the time to be overly aggressive. A more neutral/mildly bullish stance is currently warranted. We will be looking for our models and the weight of the evidence to turn more positive before committing additional capital to equities. At this point, the competing number of bullish and bearish indicators illustrates that markets remain vulnerable and are likely to continue to meander until economic growth can find a more solid foothold.
If you have any questions or comments, please feel free to call any time.
Donald L. Hagan, CFA
— Written 12-05-2016