Rutherford Portfolio Review (Tranche 3): 5 August 2022

The Scenic Rhine -from Architecture to Horticulture

This week was mildly bullish for US equities:

although prices were not able to push through the 417 level (grey dashed line) that has acted as support and resistance over the past 6 months. We are currently trading near the top of the upward bullish channel and next week will see whether we can continue this trend or whether 417 will, yet again, act as stubborn resistance as in early June. Implied Volatility is (relatively) low, that indicates low levels of concern, so a continuation of the bullish trend should be no great surprise – but channels are powerful trend indicators and it would not be surprising to see at least a small pull-back to the bottom of the channel at ~400 – also a potentially strong support area.

In terms of performance relative to other asset classes:

US equities were close to the top of the list – but no asset class was clearly dominant. This has been the case for past few weeks – suggesting that wide diversification might be the best strategy at the moment. Commodities continue to underperform.

Current holdings in the Rutherford Portfolio look like this:

with Tranche 3 (the focus of this week’s review) holding positions in VNQ (US Real Estate), TLT (Long-term Treasuries), DBC (Commodities) and AOR (the benchmark equity/bond fund).

Recent portfolio performance looks like this:

slightly ahead of the benchmark fund but losing a little ground due to the high allocations (~45%) to Cash.

Until last week I had been using the BHS model to manage this portfolio – and this has worked out ok considering the dififcult markets over the past 7 months – the BHS system got us into Commodities at the beginning of the year and this helped considerably (even if this asset class now seems to have run out of steam). Of course, timing of entries and exits would impact performance considerably – but tranching has helped smooth this out.

Current rankings and recommendations from the BHS system (using the default 60- and 100-day lookbacks) look like this:

…. so we are still not getting any Buy signals. Note that short-term signals (HA and Short-Term EMA) are positive, but longer term momentum (Rank in 4th column from left and LRS1/LRS2 values) are still negative.

Last week I started to move this portfolio to a more “rotation-based” system and this week’s rotation graphs look like this:

There isn’t a lot to find in the top right quadrant – where we would like to see the action – but recommendations from the new model look like this:

with Buy recommendations for AOR and VTI and Hold recommendations for VNQ and TLT. Obviously, following this model will have us in the market (for better or worse) whereas the BHS does not. Since I have no back-test data for this system I cannot recommend it – but I still like it enough to run a forward test for members to follow.

Consequently, these will be my adjustments to Tranche 3 for this week:

i.e. I will be selling the last of my holdings in DBC and replacing them with 14 shares in VTI. Rather than sell a portion of the shares in TLT and purchase extra shares in VTI and AOR (as recommended from the model) I will save on trading costs by continuing to hold the TLT shares. This does not change things significantly – just leaves me with a slightly lower allocation to US equities than is recommended by the model.

David