DAY HAGAN TACTICAL ALLOCATION STRATEGY DECEMBER 2018
Based on the December investment model updates and corresponding position changes, the Day Hagan Tactical Allocation strategy (DHTA) is now 68.3% invested in equity and equity alternatives, representing an increase of 20.5% from last month. The fixed income and cash allocations are now 21.0% and 10.7%, respectively.
The global equity allocation for the DHTA strategy is now mildly bullish. However, the models remain somewhat cautious toward international equity markets, currently preferring the U.S. over other global regions. Outside of the U.S., the Japan and Emerging Market regions are showing model improvement.
The Catastrophic Stop model remains positive. Note that this model was developed to raise cash (reduce equity exposure) should the equity market environment become very negative from both technical and fundamental perspectives. With the U.S. equity market (S&P 500) down -8.19% below its all-time high, the model is signaling that we are more likely in the midst of normal corrective activity rather than a global financial meltdown. If the model should move to a sell signal, we will be quick to react.
We have been underweight international equity markets most of the year. Global economic activity has been slowing coincident with a steady deterioration in measures of consumer and business confidence around the world. This has been reflected in the weak returns from several of the international markets we follow, as shown below (year-to-date returns through 12/4/2018):
U.S. equity ETF:
International equity ETFs:
Even fixed income has had a tough year:
The model’s macro indicators show that negative sentiment for equities may be nearing a bottom. From a contrary opinion perspective, this can often identify short-term support as investors begin to rebuild positions from lower levels.
Other positive indicators for equities include technically based overbought/oversold indicators (now more oversold) and central bank monetary policy still generally reflected as accommodative.
Conversely, there are still a few indicators that are keeping the model from recommending a higher equity allocation. For example, momentum and breadth haven’t broken out to higher levels and global PMIs are deteriorating, confirming our concerns around economic activity. Furthermore, global earnings yields are becoming less appealing versus the now-higher global bond yields. In other words, the expected return from stocks isn’t enough to justify the increase in risk over and above fixed income returns (which are generally considered safer).
From a regional equity perspective:
The U.S. composite model has the highest reading of all the regional models
We are now overweight the U.S. benchmark weighting (the U.S. benchmark weighting is 33.49%)
Most technical and fundamental indicators are rated neutral to positive
The only caution signs are a deterioration in relative strength vs. other regions, adjusted earnings growth being rated as somewhat slow relative to U.S. GDP growth, and the narrowing of the yield curve
The Emerging Markets composite model is the second-strongest model
We are now overweight the Emerging Market benchmark weighting (the Emerging Market benchmark weighting is 6.76%)
Momentum and breadth are improving
Weaker PMI readings (likely due to trade concerns), elevated overall valuations based on ROE, earnings yield and long-term earnings’ growth estimates, and the weakness in crude oil continues to negatively impact export-based emerging market economies
The Japan composite model is the third-strongest model
We are market-weight the Japan benchmark weighting (the Japan benchmark weighting is 4.48%)
The indicators for Japan are more mixed, with breadth starting to improve but economic activity still below average and valuations nearer to fair value levels
We remain underweight the Europe, U.K., Pacific ex-Japan, and Canada regions
With regard to our fixed income (plus cash) allocation, we are now near the benchmark weighting. This indicates that the models are neither bullish nor bearish on bonds.
Overall, the model continues to quantitatively address potential risks vs. reward and continuously funnels exposure towards areas of strength. While the volatility this year has reawakened investors to the concept of risk, the reality is that the S&P 500 is just about 8% below its all-time high and that 10% corrections, based on historical precedence, have actually occurred about once a year on average.
Bottom Line: The models are unemotional, and the message they are delivering is that there is an opportunity for the markets to embark on a year-end rally. However, if said rally doesn’t materialize and the indicators reverse back to “caution,” we will be quick to take action.
If you have any questions or comments, please feel free to call anytime.
Donald L. Hagan, CFA
Arthur Huprich, CMT
PDF Copy of Article: Day Hagan Tactical Allocation Strategy Update December 6, 2018 (pdf)
(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.)
The S&P 500 Index is an unmanaged composite of 500 large capitalization companies. This index is widely used by professional investors as a performance benchmark for large-cap stocks. You cannot invest directly in an index and unmanaged index returns do not reflect any fees, expenses, or sales charges.
The data and analysis contained herein are provided "as is" and without warranty of any kind, either express or implied. Day Hagan Asset Management (DHAM), any of its affiliates or employees, or any third-party data provider, shall not have any liability for any loss sustained by anyone who has relied on the information contained in any Day Hagan Asset Management literature or marketing materials. All opinions expressed herein are subject to change without notice, and you should always obtain current information and perform due diligence before investing. DHAM, accounts that DHAM or its affiliated companies manage, or their respective shareholders, directors, officers and/or employees, may have long or short positions in the securities discussed herein and may purchase or sell such securities without notice. DHAM uses and has historically used various methods to evaluate investments which, at times, produce contradictory recommendations with respect to the same securities. The performance of DHAM’s past recommendations and model results are not a guarantee of future results. The securities mentioned in this document may not be eligible for sale in some states or countries, nor be suitable for all types of investors; their value and income they produce may fluctuate and/or be adversely affected by exchange rates, interest rates or other factors.