Rutherford Portfolio Review (Tranche 2): 29 July 2022

Castle on the Rhine, Germany

With continuing high inflation and weak GDP numbers supporting concerns of a recession we naturally saw a strong week in the US equity markets 🙂

As we can see in the above figure, the break-out from the downtrend channel that we saw last week was confirmed by the follow-through that we saw this week – despite little encouragement from the economic sector. Technically, I can now identify the ~362 level (D) as a pivot low – and this lies in the support zone between the 200% retracement (368) of the previous bullish move (BC) and the 161.8% Fibonacci extension of the ABC trends (358). Current price is sitting near the 100% retracement of the BC trend that also corresponds to the prior pivot low at 415. This may well act as strong resistance to a continuation of the bullish trend – especially in light of current economic conditions. However, Implied Volatility is at very low levels, relative to recent values, and this is usually a bullish signal since it reflects low concern or panic from investors. I have no idea where we might go from here, although we may just sit in the 360 – 415 range through the summer doldrums (if vacationing comes back into popularity) – sell in May and go away!.

Checking the performance of other asset classes over the past week:

we see that US equities do not top the list – with strong bounce-backs from Commodities and US Real Estate outperforming equities. However, all but long-term treasures showed positive returns on the week.

Over the past month I have been legging out of Commodities and Gold and accumulating Cash. Current holdings look like this:

with 50% of available funds in Cash. Performance of the Rutherford Portfolio therefore looks like this:

and, while staying ahead of the benchmark, has lost out a little as a result holding Cash and of stronger performance in the equity sectors over the past month.

I am therefore keen on re-investing the Cash wherever returns can be generated in the future. So, let’s check on rankings and recommendations from the BHS model:

As we can see, there are no Buy recommendations from this model (or from the DM, HA or LRPC models). Although momentum models do a reasonably good job in keeping us out of the market as it declines, one of the weaknesses (or at least frustrations) of the models is that they tend to be slow in getting us back into the market when it decides to bounce back. This is the primary reason why I continue to watch the rotation graphs:

Intuitively, I feel that this information should be useful. However, I have not been able to come up with an algorithm to use the data in a model that outperforms the more conventional models already built into the Kipling workbook – but I continue to grind away at it 🙂

With this in mind, the following screenshot shows recommendations from a new algorithm/model that I built into the spreadsheet:

As we see in the above figure, we now have three Buy recommendation (and these just appeared on Thursday/Friday of last week). This reflects the generation of more bullish signals (green cells) than we have seen for a number of weeks. So, is this a good time to get back in the market. Obviously I don’t know the answer to that question, but, since this is a tranched portfolio I can dip a toe in the water and attempt to leg back in. So, my plan will be to sell my existing holdings in DBC and to buy shares in VTI, VNQ and TLT. Note where these assets lie on the rotation chart.

This will still leave me with Cash available in this tranche – but at least gives me the chance for profits if US equities, Real Estate or Long-Term Bonds decide to bounce – something close to a 60/40 portfolio plus 30% Cash:

Note that VTI and VNQ are slightly undersubscribed relative to their 25% maximum allowable allocations – this is a result of restricting position risk to 3%. However, total portfolio risk is still sitting at a little under 9% if stop loss orders were to be used. I shall not be using TSLOs with this portfolio. I plain just don’t like them and they frustrate me – but I understand why more risk averse investors might choose to use them. Either choice is ok provided you are comfortable and prepared to live with the possible consequences.

Although I have not back-tested this new model (too many other things to do rather than spend time going through the laborious, time-consuming, manual process) I am comfortable enough to try it on a live account. Maybe, in future, if I have nothing better to do 🙂 , I will try a back-test. Forward testing is better since it contains no bias – the ideas/assumptions either work or they don’t – and you can’t go back and change any parameters to show better results. The only problem is that I won’t be able to run a 40-year forward test 🙂