Asset Model Portfolio: 1.12.14

Last week I opined: “Are the asset winds changing?” This week, we can say, “Indeed they are.”

Introduction

Our fundamental Treasury bond model has turned bullish and this has far reaching implications across the various asset classes.

First, our fundamental trading model for gold has turned positive. Last week our technical model turned positive on gold (and we added a half position in GLD to the 4 Asset Model Portfolio). So with both fundamentals and technicals in alignment, this makes us bullish on gold. We will increase our allocation to 20% in GLD at Monday’s opening.

Second, with Treasury bond yields falling (i.e., positivity in our bond model), crude oil pressures should subside. This is the apparent message of the poor price action over the past 2 weeks as both the fundamentals and technicals are in alignment. We are bearish on crude oil. Figure 1 is a weekly chart of the i-path Goldman Sachs Crude ETN (symbol: OIL), and we note that prices closed this past week below a key support level.

Figure 1. Oil/ weekly

Turning to Treasury bonds, we note that the technicals and fundamentals are in alignment as well. See figure 2, a weekly chart of the Vanguard Total Bond Market Fund (symbol: BND). We note that prices are firmly above support levels.

Lastly, let’s ask the question: what do these changes in the asset classes mean? Bullishness on gold and Treasury bonds usually means economic weakness or what we have seen over the past 5 years, more Federal Reserve largesse and more currency debasement to support a struggling economy.

Figure 2. BND/ weekly

4 Asset Model Portfolio: Performance 2013/2014

Our portfolio rules state: 60% of the funds are allocated towards equities when there is an equity buy signal. When equities are on a buy signal, the other 40% of the portfolio is divided up equally amongst the other assets. If equities are not on a buy signal, then the other assets get no more than a 20% allocation each. We do not use leverage.

Last week we added a 10% position in GLD.

This week we will increase our GLD position to 20%. We will liquidate our entire position in OIL, and we will add a position in BND equal to a 20% allocation. All this will be executed using Monday’s opening prices.

The 4 Asset Model Portfolio spreadsheet is updated through Friday.

Figure 3. 4 Asset Model Portfolio/ spreadsheet

Closed positions from the 4 Asset Model Portfolio are shown in the next spreadsheet.

Figure 4. 4 Asset Model Portfolio/ closed positions

I have put together a table of our 4 assets showing which mode I think we are currently in. As our models tend to be constructed with both fundamental and technical data, a bull signal is registered when both fundamentals and technicals are positive. A bear signal is registered when both fundamentals and technicals are negative. A neutral signal means that only 1 element of our model is positive. Neutral market signals tend to be ruled by overbought and oversold conditions; the market is range bound. We can be buyers in bear markets as conditions can be ripe for a reversal, so being bullish in a bear is acceptable.

Figure 5. 4 Assets/ Signals