Within our CMG Tactical Rotation Strategy we allocate monthly to the top two out of the following six ETFs: SPY (S&P 500 Index), EFA (Developed Market Stocks), VNQ (Vanguard REIT), BND (Treasury Bonds), DBC (Commodity ETF) and Cash. We look to identify and lock onto leadership. Positions are then held for at least one month. Since price momentum tends to do a good job at identifying market leadership, the positions are typically held for a number of months.
The point to note here is that noticeably absent from the strategy has been an allocation to DBC. The last meaningful and consistent exposure to commodities was in 2007 and 2008. I’m watching carefully for a change and will post if a trend towards higher commodity prices develops. In hindsight, and appropriately, the strategy has been largely SPY, EFA and VNQ.
While I have had many meaningful debates with very smart advisors about future inflation (and yes, I’m a big fan of John Williams’ ShadowStats letter), it is not showing up in a way that drives the Fed to raise interest rates, and absent a spike in rates, the dance continues. I think it will come but we are still early.
Price momentum is a good tool to use to identify and lock into major leadership trends. After avoiding bond exposure for most of last year, we have seen a decided pick up in that exposure. Absent has been exposure to commodities and that remains the case today.
As a side note, we continue to see exposure to U.S. equities and are also seeing health care and technology leading over most other sectors.
If inflation does indeed begin to pick up, I expect to see commodity funds and ETFs moving to a position of leadership within our tactical strategies. So despite my concern about inflation, it is not yet showing on our radar screen. – Steve Blumenthal