DAY HAGAN TACTICAL ALLOCATION STRATEGY MAY 2018
Based on the May investment model updates and corresponding position changes, the Day Hagan Tactical Allocation strategy (DHTA) is now 75.9 percent invested in equity and equity alternatives (an increase of 12 percent from last month), 12.4 percent in fixed income (a decrease of 18.7 percent) and 11.7 percent in cash and cash alternatives.*
The equity allocation for the DHTA strategy is now mildly bullish. Furthermore, the models mandated a decrease in our fixed income exposure this month and the overall allocation is now well below our benchmark weighting. Last month we reduced fixed income duration, and this is a continuation of that process.
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. This month’s allocation changes represent the models’ improving scores for equities.
- Volatility has increased as expected, and the shift has been priced into the markets at this juncture. 2018 is looking more normal from a risk-reward standpoint.
- 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. At this point, the models assess risk versus reward as balanced.
From a global equity perspective, the following changes were made:
- Increased exposure to U.S. Small Cap blend (IJR)
- Broader-based short and intermediate trend models favor small cap equities, as do relative forward earnings yields. Additionally, seasonality favors small caps through mid-year. From a macro perspective, we are closely monitoring interest rate and dollar models for signs that are turning either more in favor or against small caps.
- The U.S. continues to evidence solid economic growth, which is positive for smaller cap companies.
- Increased exposure to U.S. Large Cap growth (IWF)
- Technology stocks and FANG stocks are illustrating short-term oversold readings following the most recent declines.
- Increased exposure to the Japan and Asia regions (HEWJ, EWJ, AAXJ)
- Trend indicators for Japan are starting to flip to positive readings. Relative strength, momentum, and breadth indicators support continued gains.
- We offset some of the dollar exposure for this allocation by adding to the iShares Currency Hedged MSCI Japan ETF (HEWJ).
- Increased exposure to Europe and the U.K. regions (HEZU, VGK, EWU)
- Trend indicators for the U.K. have markedly improved, with relative strength, moving average crossovers, and momentum positive.
- Composite valuation scores, sentiment reversals, and the 10-2 yield curve all support the increased exposure.
- We’ve also offset some of the dollar exposure to the euro by purchasing the iShares Currency Hedged MSCI Eurozone ETF (HEZU).
- Europe’s economy is strong and improving. The European Central Bank (ECB) has even started tapering.
- Increased exposure to Emerging Markets (IEMG)
- Emerging Market exposure is supported by Leading Economic Indicators, Purchasing Manager Indexes, higher oil prices and CRB metals pricing.
- From a price-related standpoint, positive momentum and major moving average support remains intact.
- We’d note that China continues to illustrate economic stability and Leading Economic Indicators point to continued strength.
While our models have mandated we increase equity exposure based on the weight of the evidence, we are well aware of the risks circling the market. To name a few:
- Tweet risk
- Trade War risk
- Interest Rate risk
- Inflation risk
- Fed Policy Mistake risk
- Pension Liability/Debt Level risk
- Russia/Syria risk
- EU/Brexit/Populism risk
- FANG risk
- Earnings risk
- Midterm Election risk
Given the above, our fixed income and cash cushions seem appropriate.
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. If the market doesn’t find support and takes a second leg down, we will be quick to follow our models’ direction and lower equity exposure. The bottom line is that broad-based indicator confirmation is the key to success.
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 May 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.)
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