To The Moon

TL;DR: Capital protection continues
Portfolio: Performance flat in July, positive in August
Allocation: FX (30%) and Cash (70%)
Markets: Most asset classes remain under pressure

Ongoing Capital Protection
If there is one table to remember, then this: The Fed has never stopped hiking before the Fed Fund Rate was above the CPI (Consumer Price index). U.S. rates are below 3%, and inflation is above 9%. There is still a massive delta between the two. If inflation does not come down quickly, there is still a long way to go for rates. 2022 will not be the year when the hiking cycle peaks.

In addition to rising rates, stocks are still expensive. There are many different indicators to measure how expensive or cheap stocks are. One famous one is the Buffett Indicator (the size of the stock market in relation to the economy). Despite the 2022 sell-off, the valuation of stocks remains historically high, at levels above the Dotcom bubble from 2000.

Expensive stocks in an environment of rising rates are not the setup for a market bottom. What we have seen in 2022 can easily continue in 2023. Right now, there are few places to hide for investors. Momentum in stocks, bonds, commodities, and real estate remains weak. Only currencies driven by a strong USD remain trending upwards. Capital protection now to buy generational lows later remains the name of the game.

Performance
During June’s bear market rally, the performance of our Global Momentum portfolio was slightly negative (-0.6%). August was challenging for global bond and equity markets while our portfolio gained 1.6%. For most trend-following systems, Commodities and FX have been the two primary sources of return in 2022. With the start of September, a significant change has happened. For the first time this year, the system is out of commodities. Uptrends remain only in currencies. The majority of our capital sits in cash.

ETF Addition: VMFXX
From next month on, we will include the VMFXX (Vanguard Federal Money Market Fund) as an alternative to our cash ETF (SHY) in our universe. There are times when one outperforms the other. We expect to optimize our performance when holding cash by applying our trend algorithm to both.

The Bottom is near?
Here is one more interesting piece of research from Ned Davis Research. The chart illustrates the performance of the S&P 500 following an 18% decline from a peak depending on whether or not a recession occurred.
The black line shows the average market performance if there was no recession after the decline. The dotted blue line shows the average market performance when a recession occurred.

The market peaked in January. It has been four months since the 18% decline in May, and the market started to deviate from the back line.
Note the yellow circle at month +7. Historically, on average, a retest occurs about seven months after the 18% decline if a recession is involved.

Follow the trend and manage your risk 📈

Best,
Sebastian

Capital protection. Conflicting signals? Follow the price! was originally published in DataDrivenInvestor on Medium, where people are continuing the conversation by highlighting and responding to this story.