DAY HAGAN TACTICAL ALLOCATION STRATEGY APRIL 2018

Based on the April investment model updates and corresponding position changes, the Day Hagan Tactical Allocation strategy (DHTA) is now 63.9 percent invested in equity and equity alternatives (a decrease of 4 percent from last month), 31.1 percent in fixed income (an increase of 4 percent) and 5 percent in cash and cash alternatives. *

The allocation for the DHTA strategy remains neutral with regard to equity exposure. Although we slightly increased our fixed income exposure again this month, the overall level remains below our benchmark weighting. We note that the increase in our bond weighting was allocated to a shorter-duration fixed income index ETF. As written last month, this “likely represents a shorter-term opportunistic investment, and we are monitoring our bond models closely.” The cash allocation mirrors our benchmark at this juncture.

The Day Hagan Tactical Allocation strategy uses a quantitative, model-based, weight-of-the-evidence approach to determine the levels of investment and, by proxy, the levels of risk that should be taken at any given time. Currently, the overall equity vs. bond model indicates that risks have increased for stocks and diminished slightly for bonds. This month’s allocation changes, therefore, represent another reduction in portfolio risk.

Specifically:

  • Global equity markets are still trying to find their footing. While global economic activity, earnings trends, and central bank support remain positive for stocks overall (among other positive underpinnings), recent technical damage accompanied by our long-anticipated reversal from extreme optimism toward pessimism remains a market headwind. Broadly-speaking, investor portfolios around the world are still being recalibrated as equity ownership moves from weak hands (nervous holders) to strong hands (value investors) and de-risking takes place. Following a correction, this is a fairly typical process that has occurred with some regularity.
  • We will continue to take direction from our models that either 1) the correction is stabilizing and it is time to add exposure or 2) the correction has more downside risk and we should continue to reduce our equity allocation.

From a global equity perspective, the following changes were made:

  • Reduced exposure to Europe
  • The internal (price-related) model composite for the U.K. region and the external (fundamental/economic) model composite for Europe ex-U.K. region declined. Weak price action for both regions continues to warrant caution. Additionally, both regions’ Leading Economic Indicators continue to portend flat-to-lower economic activity ahead.
  • Reduced exposure to Japan
  • Japan continued to evidence breadth deterioration as new highs relative to new lows describe ongoing underlying weakness. The internal composite model moved to levels which have typically been associated with a high-risk environment. The only indicator that improved this month was sentiment, which may have finally reached near-term excessively pessimistic levels. Nonetheless, the overall indicator evidence supports our below-benchmark weighting to the region.
  • Reduced exposure to U.S. Large Cap Growth and S&P 500
  • Large Cap Growth indicators (and, by proxy, S&P 500 indicators) indicate that risks should continue to be reduced this month. Part of the reduction in risk was accomplished by moving a portion of our equity exposure from Large Cap Growth and the S&P 500 into a U.S. Large Cap Dividend-Focused index.
  • The shift was largely the result of price-related indicators moving more in favor of Value, as growth areas of the market, including FANG stocks, remain under pressure.

Although portfolio risk levels have been reduced, there is enough indicator evidence to support our remaining equity allocation. In other words, it’s not time to be bearish, but it’s not time to be overly aggressive either.

We will be looking for our models and the weight of the evidence to turn more positive before committing additional capital to equities or fixed income. 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 and there is more clarity on the big issues. Our view is that taking oversize positions based on “hope and change” is risky. Broad-based indicator confirmation is the key to success.

If you have any questions or comments, please feel free to call anytime.

Sincerely,

  • Donald L. Hagan, CFA
  • Arthur Huprich, CMT
  • Regan Teague

Disclosure:  (Note: *The fixed income and cash allocations reflect holdings within the exchange-traded funds that are utilized. Therefore, individuals may look at their portfolios and see slightly different stock/bond/cash allocations.)

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