Rutherford Portfolio Review (Tranche 1): 9 December 2022

Old and New “Horses” in Vienna, Austria

US Equities pulled back a bit this week, closing down ~3.5% from last week’s close:

In last week’s review I noted that prices had moved outside the 1 Standard Deviation upper boundary of the long-term downtrend channel. However, I also pointed out that, technically, there was potential resistance in that area and that it would not be surprising to see a drop back inside the channel. This is where we are sitting after Friday’s close – slightly inside the upper boundary of the longer-term downtrend channel, and at the bottom of the short-term bullish channel – so still no clear indication where we go from here. 4300 would be a target for a move to the upside with 3600 and, possibly, 3300 targets to the downside – likely in the next 2-3 months.

US Equities have not been the only weak asset class over the past week:

with no asset classes showing a positive return. On a relative basis bonds are still showing strength.

Over the past month I have been slowly moving the Rutherford portfolio from Cash and back into the markets:

only Tranche 1 (the focus of this week’s review) remains 100% in Cash – so we shall be looking for recommendations as to how this might be allocated to the assets in the quiver.

Performance of the portfolio over the past ~2 years looks like this:

i.e. with returns pretty well in line with returns from the benchmark AOR Fund. However, if we look at a comparison Year-To-Date (YTD) we see this:

i.e. the Rutherford  Portfolio, despite variations between tranches due to review-date (timing) luck), has significantly outpaced the benchmark. This has been due to the selection of Gold and Commodities earlier in the year. I know that many investors (and readers of this blog) do not like to hold these assets – due to lack of dividend distributions and filing complications at tax time – but this is a good example of how they can have their place in a diversified portfolio. Another benefit to the portfolio this year, compared to last year, has been the elimination of the use of stop loss orders and a reversion back to faith in the momentum system to get us out of the market in a downturn. As can be seen in the above figure the Rutherford was moved to Cash through most of October and November and, as mentioned above, has only recently been moved back into qualifying assets.

Until recently (the past month) the portfolio was managed using the BHS system – so we’ll do a final check on recommendations from that system before focusing on the new “rotation” system:

For the past ~3 months the recommendations from this model were to stay invested in Cash but, as we see above, we currently have a Buy recommendation for Gold.

However, since I have made the decision to move to a rotation system let’s take a look at the rotation graphs:

where we see a continuation of the positive performance of VEA (Developed Market Equities) that we’ve seen for the past few weeks and which has resulted in the gradual acquisition of shares in this ETF in tranches 2-5. If we check the rankings and recommendations sheet we see this:

that is a little surprising in that VEA , despite its strong looking performance in the rotation graph and No.1 ranking, is not a recommended Buy candidate (although this would flip quickly on a short-term bounce – with HA3 turning positive and Score moving to 10). We’ll have to watch this (it may be that I’ve still not got the algorithm right) but, meanwhile I am going to stick with the recommendations – something like this:

This will add a little more diversification to the total portfolio and allow us to see how it works in this current uncertain environment. Note that, rather than hold Cash I have chosen to add a few more shares in AOR. This is a discretionary decision based on the rotation graphs where we see AOR is stronger than SHY (Cash proxy) in both the longer and shorter term momentum characteristics.

Once the Portfolio is adjusted based on recommendations from the Rotation model (i.e. after this week’s adjustments) I will re-balance the tranche allocations so that we can follow the impacts of review date (timing) luck on performance for the new model. We know that the BHS has shown significant deviations over the past 2 years – and I don’t really expect a significant difference for the new model i.e. I think this is a big issue for any system – but we’ll follow it.