Alpha Momentum Strategy - Portfolio Report – May 2018 – Second Half

As per The Alpha Momentum Strategy:

Both the intermediate and long term trends of the S&P 500 are higher. This is a material change. On 4/15/2018 we determined that the intermediate trend of the S&P 500 was down, and as such, we moved half of the portfolio to cash.

Our intermediate trend indicator has now moved back into “uptrend” mode and, given that the long term trend remains higher, the model portfolio now moves to 100% invested.

We will be executing trades such that the model portfolio reflects the following composition as of close of trade tomorrow, May 15th, 2018.

On April 15th, we wrote:

“When the system determines that the trend of the stock market is down on one time frame (but not both), like right now, we take a defensive stance and move half of the portfolio to cash. We move to cash in order to protect capital and avoid a deep and prolonged drawdown.

What is the risk in moving such a significant portion of the portfolio to cash? The risk is that the market quickly regains strength and continues higher without us. While our testing shows that that can certainly happen (and often does), our testing shows us that by taking the risk of missing out on some upside performance, we are increasing the likelihood that we avoid drawdowns of 30%+ like those seen in the early 2000s and during the Great Financial Crisis. This is a risk that we want to take.”

By moving the portfolio to a half cash position, we were positioning ourselves to take less of a hit should the market have continued to move lower. The market has recovered some, so we lost a little bit in terms of short term performance due to the model’s “semi-risk-off” positioning relative to the index.

The S&P500 total return index has returned ~2.8% since 4/15, so by reducing this exposure, we definitely left some money on the table.

The Alpha Momentum Strategy is a long term oriented investment strategy that is designed to significantly outperform index investing over the long term with substantially lower risk. That said, there will be periods of short term underperformance and “chop” due to premature defensive positioning. This is the price we sometimes pay for superior long term returns, and we wrote about that cost HERE.