An advisor client asked me how I use the CMG Ned Davis Research Large Cap Momentum Index within a total portfolio. My two cents is I like to have a systematic way, absent emotion, to raise some cash when the weight of technical evidence is negative and a way that gets me back fully invested when the weight of evidence is positive.
For example, I would favor a 30% allocation to equities at this time because, in my opinion, valuations are high (as you’ll see in Friday’s “On My Radar,” we are now at a level that is higher than it was at the market peak in 2007). In my personal account, within my 30% equity weighting, I would have one-third invested in an ultra-low fee large cap ETF. On sell signals, I would trade that large cap equity ETF to BIL (a short-term Treasury bill ETF).
This would give me a systematic way to raise cash. It also would give me a systematic way to put exposure back on. The next major correction will drive valuations to a more attractive level where the entry will provide more attractive 10-year forward return potential.
By lowering my overall equity exposure to 30% (due to extremely high valuations, in my view) and further moving 10% to cash while hedging the other 20% equity exposure, my goal would be to be in a position to take advantage of the opportunities that the next bear market will present. I would increase the liquid alternative portion, in general, to 40% and I hope that my tactical and managed futures positions would provide low correlating gains. When equity valuations get good again, I would shift back to 50% or even 60% to equities (unhedged).
El-Erian is recommending investors hold 25% in cash. That’s a lot and what does one do when the market gets hit. How do you decide when and how much to buy back in? It won’t feel like opportunity just like it didn’t in 2008. I favor a disciplined/systematic way.
The current opinions and forecasts expressed herein are solely those of Steve Blumenthal and are subject to change. They do not represent the opinions of CMG. CMGs trading strategies are quantitative and may hold a position that at any given time does not reflect Steve’s forecasts. Steve’s opinions and forecasts may not actually come to pass. Information on this site should not be used as a recommendation to buy or sell any investment product or strategy.