Rutherford Portfolio Review (Tranche 4): 14 January 2022

Now this looks like trouble – I quickly put the car into reverse! Hluhluwe-iMfolozi Game Park, South Africa

US equity markets, as represented by the S&P 500 Index (SPX), continue to trade in the 300 point range between 4500 and 4800 that they have been in for the past two months:

The confusing channels shown in the above figure re-enforce the fact that the market has no clear direction or trend. We should remind ourselves that this is not good for momentum systems and is when we see whipsaw trades and we should manage our accounts carefully. We cannot make money without price movement and we don’t want to be buying high and selling low – that can happen if we are using a momentum system and our timing is bad (review date luck) – so, it is always advisable to check the charts and to be aware of where we are in the channel. At the present time we are sitting in the middle of the primary sideways channel in a minor, shorter-term, downtrend channel – but it is a toss-up as to whether we might go up or down from here.

Last week started with a significant drop in price at the Open on Monday followed by a 3-day bounce before a partial retracement towards the end of the week. The net result was a small close lower than last week’s close and relatively high volatility in the 18-20% range (suggesting a little mild nervousness and uncertainty in the markets).

How does this compare with the performance of other asset classes?:

where we see VTI – our often-used ETF to represent the broader US market universe – sitting close to the bottom of the list with Commodities, Gold and International equities showing strength at the top. Bonds and Real Estate were weak.

How is this reflected in the performance of the Rutherford Portfolio?:

– a rather muted reaction – generally in line with the benchmark AOR Fund. As I posted in the comments section of last week’s review I was stopped out of VNQ (Real Estate) in some of the tranches where I had placed stops at the 1 SD level. Holdings in other tranches, with stops at 1.65 SD were not sold. Current holdings in the total portfolio look like this:

where we see that Tranche 4 (the focus of this week’s review), is holding positions in AOR, TLT and DBC with ~$5,700 in Cash as a result of the VNQ sales.

Let’s check current rankings and recommendations from the BHS momentum model:

where we see Buy recommendations for DBC and GLD, Hold recommendations for AOR and VNQ and a discretionary Hold? recommendation for VTI. TLT, that is currently held in Tranche 4, is a recommended Sell.

But, before making any final decisions we’ll take a look at the rotation graphs:

where we see strong rotational movement (long tails) in DBC, VWO and (to a lesser extent) VEA. Does this suggest a possible rotation from US equities to International equities? This is something that we’ll follow in the coming weeks.

In contrast to the long tails for DBC and VWO we can’t even see GLD in the above rotation chart – so I’ll blow up the movement of GLD so that we can see what’s happening:

i.e. GLD is sitting at the origin with little to no volatility – but, what little there is tends to be positive momentum to the upside in both the short- and intermediate-term time frames (upward and to the right). [As an aside: it is worth noting that, with such low volatility, a Risk Parity Portfolio with GLD in the quiver would likely be allocating a relatively large percentage of funds to this asset class. The Darwin Portfolio will be up for review next week so we’ll see what the impact is at that time]

Let’s see what the rotation model is recommending:

where, again, as for the BHS model, we see Buy recommendations for DBC and GLD and a Sell recommendation for TLT. In addition TLT is sitting below all the EMAs and the 13-period EMA is below the 49-period EMA.

Based on the above information I will be selling current TLT holdings in Tranche 4 and Buying shares in GLD:

Like Lowell and other ITA members I am not a big fan of Commodities and Gold because of their poor expected returns over the long term when considered separately but, when included in a multi-asset-class portfolio, they do fulfil their objective of reducing risk through diversification of their co-variance. If we can use momentum to help us choose appropriate times to enter/exit positions in these asset classes there is clearly a benefit to doing so (especially for the risk-averse investor). DBC has performed well for us in recent months and, should Gold follow historical trends of providing a hedge against inflation, I am comfortable adding GLD to the portfolio at this time. Normally I would limit this allocation to 25% of the tranche value but, with no other obvious Buy recommendations and a little extra Cash I am adding a little more here and moving to 36%. VWO is looking tempting here, but we’ll see what it does over the next week.

David