Tactical Analysis

Tactical Analysis

Note

Data on this page was last updated on December 05, 2022

Expectations

Expectations are all about trying to identify future expectations of a particular asset.

Warning

A practitioner needs to confirm the expectations with a trend following model and risk management rules. It should not be viewed in a vacuum, and external forces should always be considered.

Long-term (CAPM) Expectations

Running the traditional CAPM model sets the framework for analyzing a multi-factor regression model. It also helps to understand the academic world’s perspective on the asset class. I would not put too much weight on these statistics unless you are a pension fund with very long-term investment horizons. Most of us are not and need to adjust our expectations for both the business cycle and economic factors.

Annualized Performance Metrics (Rf = 2.00%)
Return Std Dev Sharpe Beta
Sector - Health Care 9% 0.1836 0.3731 0.732
Bechmark (Wilshire 5k) 8.36% 0.1809 0.3439 1.000
Sector - Consumer Staples 6.99% 0.1560 0.3122 0.530
Gold 7.64% 0.1787 0.3086 0.050
Sector - Consumer Discretionary 8.82% 0.2291 0.2912 0.999
Sector - Industrials 8.29% 0.2170 0.2836 0.968
Sector - Utilities 7.36% 0.1964 0.2670 0.602
Sector - Retail 9.51% 0.2769 0.2653 1.065
Sector - Materials 8.37% 0.2437 0.2555 0.966
Sector - Energy 8.47% 0.2942 0.2152 0.996
Sector - Technology 7.42% 0.2628 0.2014 1.158
Sector - Financials 4.75% 0.2965 0.0903 1.246
Industry - Regional Banking 4.14% 0.3400 0.0613 1.277
Industry - Regional banks 4.14% 0.3400 0.0613 1.277
Silver 2.64% 0.3169 0.0194 0.348
Industry - Banks 2.05% 0.3572 0.0010 1.366
Industry - Home Construction 1.92% 0.3677 -0.0025 1.322
Industry - Oil & Gas Exploration 1.56% 0.4200 -0.0106 1.387
Currency - AU Dollar 1.6% 0.1305 -0.0313 0.353
Gasoline 0.74% 0.3735 -0.0334 0.708
Brent Oil 0.8% 0.3431 -0.0347 0.673
Soybean 0.94% 0.1896 -0.0558 0.148
Physical Energy 0.32% 0.2837 -0.0586 0.542
Commodity Index 0.77% 0.1982 -0.0616 0.410
Currency - Swiss Franc 1.2% 0.1071 -0.0747 0.002
Corn 0.22% 0.2292 -0.0768 0.146
Currency - U.S. Dollar 1.08% 0.0834 -0.1100 -0.076
Agriculture -1.07% 0.1730 -0.1751 0.248
Currency - Euro -0.67% 0.0921 -0.2865 0.108
Currency - Canadian Dollar -0.65% 0.0910 -0.2868 0.221
Currency - Japanese Yen -1.1% 0.1005 -0.3039 -0.168
Currency - Emerging -0.56% 0.0777 -0.3246 0.227
Oil -11.61% 0.3746 -0.3566 0.701
Currency - GBP Sterling -1.95% 0.0981 -0.3966 0.144
Weat -9.81% 0.2704 -0.4289 0.062
Natural Gas -24.76% 0.4605 -0.5701 0.221

Business Cycle Expectations

The first step to estimating proper expectations is to understand the performance metrics filtered by our six business cycle stages. Core equities are sensitive to inflation expectations, growth, and credit risk; which often correlate to the business cycle.

Click to Show the performance tables by stage of the business cycle.
Annualized Performance in a Recession (Rf = 2.00%)
Return Std Dev Sharpe
Currency - Japanese Yen 14.27% 0.1373 0.8751
Gold 21% 0.2718 0.6847
Currency - U.S. Dollar 4.02% 0.1207 0.1624
Currency - Swiss Franc 2.69% 0.1281 0.0513
Sector - Health Care -3.03% 0.2649 -0.1869
Silver -6.43% 0.4410 -0.1877
Currency - Euro -0.36% 0.1199 -0.1942
Agriculture -6.01% 0.3026 -0.2600
Sector - Materials -11.02% 0.3527 -0.3624
Currency - Canadian Dollar -3.27% 0.1363 -0.3800
Sector - Consumer Discretionary -11.34% 0.3379 -0.3875
Sector - Energy -16.37% 0.4282 -0.4210
Industry - Oil & Gas Exploration -29.32% 0.6848 -0.4485
Currency - AU Dollar -8.52% 0.2159 -0.4783
Sector - Technology -20.93% 0.4087 -0.5504
Sector - Consumer Staples -10.45% 0.2190 -0.5580
Sector - Utilities -16.45% 0.3133 -0.5779
Bechmark (Wilshire 5k) -17.72% 0.3033 -0.6379
Commodity Index -18.3% 0.2954 -0.6742
Sector - Industrials -20.13% 0.3204 -0.6778
Sector - Financials -30.31% 0.4630 -0.6845
Industry - Regional Banking -43.39% 0.5931 -0.7505
Industry - Regional banks -43.39% 0.5931 -0.7505
Physical Energy -28.62% 0.3979 -0.7548
Industry - Home Construction -51.29% 0.6870 -0.7606
Sector - Retail -34.62% 0.4567 -0.7864
Industry - Banks -56.18% 0.6532 -0.8735
Gasoline -65.03% 0.7481 -0.8786
Brent Oil -90.1% 0.9872 -0.9146
Natural Gas -43.44% 0.4851 -0.9185
Oil -57.69% 0.6099 -0.9596
Currency - GBP Sterling -13.64% 0.1315 -1.1673
Weat -30.63% 0.2265 -1.4133
Soybean -21.24% 0.1391 -1.6394
Currency - Emerging -24.77% 0.1141 -2.3019
Corn -46.51% 0.1850 -2.5712
Annualized Performance in a Recovery (Rf = 2.00%)
Return Std Dev Sharpe
Soybean 57.69% 0.2063 2.6455
Sector - Retail 76.9% 0.2901 2.5303
Brent Oil 68.49% 0.3021 2.1568
Corn 65.97% 0.3084 2.0331
Sector - Consumer Discretionary 37.94% 0.2106 1.6720
Sector - Industrials 39.21% 0.2262 1.6118
Gasoline 56.36% 0.3390 1.5716
Sector - Materials 40.56% 0.2420 1.5612
Currency - AU Dollar 23.57% 0.1423 1.4847
Sector - Technology 33.81% 0.2111 1.4764
Bechmark (Wilshire 5k) 30.41% 0.1891 1.4718
Sector - Consumer Staples 20.85% 0.1289 1.4324
Silver 51.8% 0.3536 1.3804
Commodity Index 27.85% 0.2091 1.2111
Physical Energy 34.21% 0.2884 1.0944
Industry - Oil & Gas Exploration 45.71% 0.4086 1.0483
Sector - Health Care 18.02% 0.1568 1.0006
Sector - Energy 32% 0.2952 0.9956
Sector - Financials 35.87% 0.3405 0.9747
Oil 33.21% 0.3494 0.8751
Industry - Banks 42.61% 0.4607 0.8638
Industry - Home Construction 34.46% 0.3700 0.8595
Currency - Canadian Dollar 10.43% 0.1025 0.8046
Agriculture 16.91% 0.1858 0.7860
Gold 15.57% 0.1718 0.7736
Currency - Emerging 7.82% 0.0774 0.7354
Currency - Swiss Franc 9.41% 0.1009 0.7177
Sector - Utilities 13.72% 0.1615 0.7105
Industry - Regional Banking 31.52% 0.4121 0.7019
Industry - Regional banks 31.52% 0.4121 0.7019
Weat 19.08% 0.2542 0.6579
Currency - GBP Sterling 7.07% 0.1027 0.4819
Currency - Euro 5.35% 0.1009 0.3237
Currency - Japanese Yen 1.99% 0.1004 -0.0027
Natural Gas -29.13% 0.4806 -0.6352
Currency - U.S. Dollar -7.61% 0.0878 -1.0756
Annualized Performance in a Early Expansion (Rf = 2.00%)
Return Std Dev Sharpe
Sector - Consumer Discretionary 22.35% 0.1717 1.1606
Sector - Utilities 14.74% 0.1327 0.9399
Sector - Consumer Staples 11.75% 0.1173 0.8135
Sector - Retail 20.38% 0.2261 0.7965
Industry - Regional Banking 22.61% 0.2701 0.7474
Industry - Regional banks 22.61% 0.2701 0.7474
Sector - Health Care 12.78% 0.1458 0.7234
Industry - Home Construction 24.94% 0.3140 0.7159
Sector - Technology 13.29% 0.1720 0.6427
Sector - Industrials 13.43% 0.1860 0.6015
Bechmark (Wilshire 5k) 11.78% 0.1635 0.5854
Sector - Financials 13.7% 0.2203 0.5201
Sector - Energy 14.28% 0.2322 0.5176
Industry - Banks 15.57% 0.2639 0.5033
Brent Oil 11.84% 0.2382 0.4042
Sector - Materials 10.06% 0.2133 0.3695
Industry - Oil & Gas Exploration 13.35% 0.3470 0.3200
Gasoline 10.4% 0.2585 0.3179
Physical Energy 5.48% 0.2102 0.1615
Oil 3.07% 0.2642 0.0392
Currency - U.S. Dollar 1.77% 0.0739 -0.0321
Commodity Index 1.36% 0.1610 -0.0401
Weat -3.74% 0.2605 -0.2165
Soybean -4.23% 0.2258 -0.2712
Corn -5.88% 0.2560 -0.3025
Currency - Swiss Franc -2.11% 0.1152 -0.3513
Gold -6.27% 0.1899 -0.4279
Agriculture -3.65% 0.1296 -0.4290
Natural Gas -16.9% 0.4203 -0.4413
Currency - AU Dollar -3.18% 0.1116 -0.4566
Currency - GBP Sterling -2.39% 0.0750 -0.5763
Currency - Canadian Dollar -2.75% 0.0765 -0.6106
Silver -19.89% 0.3485 -0.6161
Currency - Euro -4.04% 0.0885 -0.6708
Currency - Emerging -4.06% 0.0794 -0.7497
Currency - Japanese Yen -8.67% 0.0939 -1.1154
Annualized Performance in a Mid Expansion (Rf = 2.00%)
Return Std Dev Sharpe
Sector - Technology 13.82% 0.1534 0.7546
Sector - Utilities 11.4% 0.1424 0.6457
Sector - Health Care 11.35% 0.1461 0.6258
Sector - Consumer Staples 9.06% 0.1127 0.6126
Sector - Industrials 10.08% 0.1422 0.5559
Sector - Financials 10.94% 0.1622 0.5394
Industry - Home Construction 12.45% 0.2068 0.4945
Industry - Regional Banking 12.77% 0.2144 0.4920
Industry - Regional banks 12.77% 0.2144 0.4920
Industry - Banks 11.34% 0.2032 0.4500
Sector - Consumer Discretionary 8.24% 0.1425 0.4282
Bechmark (Wilshire 5k) 7.05% 0.1286 0.3840
Sector - Materials 6.39% 0.1614 0.2655
Sector - Energy 3.18% 0.2130 0.0536
Currency - U.S. Dollar 1.65% 0.0724 -0.0499
Gold 0.25% 0.1367 -0.1270
Sector - Retail -1.23% 0.1818 -0.1753
Soybean -2.64% 0.1703 -0.2680
Currency - Swiss Franc -1.64% 0.1173 -0.3058
Currency - Emerging -0.55% 0.0762 -0.3306
Silver -5.43% 0.2171 -0.3362
Gasoline -10.72% 0.3132 -0.3986
Industry - Oil & Gas Exploration -12.49% 0.3502 -0.4059
Currency - Japanese Yen -1.97% 0.0939 -0.4164
Currency - GBP Sterling -2.59% 0.0929 -0.4859
Currency - Euro -2.5% 0.0860 -0.5146
Brent Oil -15.34% 0.3223 -0.5278
Currency - AU Dollar -3.33% 0.0986 -0.5319
Physical Energy -12.5% 0.2530 -0.5627
Oil -19.33% 0.3339 -0.6268
Commodity Index -8.51% 0.1510 -0.6831
Natural Gas -27.34% 0.4042 -0.7121
Corn -11.79% 0.1850 -0.7317
Agriculture -6.54% 0.1117 -0.7511
Currency - Canadian Dollar -4.3% 0.0794 -0.7800
Weat -20.41% 0.2354 -0.9340
Annualized Performance in a Late Expansion (Rf = 2.00%)
Return Std Dev Sharpe
Currency - U.S. Dollar 12.33% 0.0596 1.6968
Gold 22.76% 0.1695 1.1993
Natural Gas 62.69% 0.5212 1.1413
Sector - Energy 25.41% 0.2574 0.8907
Sector - Utilities 17.32% 0.1701 0.8820
Commodity Index 15.82% 0.1984 0.6820
Physical Energy 21.55% 0.2888 0.6630
Industry - Oil & Gas Exploration 22.05% 0.3291 0.5967
Brent Oil 23.29% 0.3770 0.5532
Oil 19.01% 0.3462 0.4812
Sector - Consumer Staples 9.51% 0.1644 0.4471
Corn 9.19% 0.1811 0.3882
Gasoline 13.05% 0.3485 0.3105
Weat 12.29% 0.3812 0.2643
Sector - Health Care 5.97% 0.1748 0.2220
Bechmark (Wilshire 5k) 4.7% 0.1708 0.1541
Sector - Financials 3.88% 0.2144 0.0854
Sector - Technology 3.7% 0.2503 0.0658
Sector - Industrials 2.35% 0.1775 0.0182
Soybean -0.62% 0.1769 -0.1463
Currency - AU Dollar 0.49% 0.0905 -0.1656
Sector - Consumer Discretionary -1.77% 0.2133 -0.1742
Agriculture -1.51% 0.1237 -0.2795
Sector - Materials -5.49% 0.2111 -0.3486
Sector - Retail -8.02% 0.2447 -0.4019
Industry - Banks -9.08% 0.1906 -0.5708
Currency - Emerging -2.82% 0.0784 -0.6047
Silver -15.02% 0.2573 -0.6492
Currency - Euro -3.22% 0.0770 -0.6664
Currency - Canadian Dollar -4.14% 0.0677 -0.8906
Industry - Regional Banking -19.58% 0.2241 -0.9449
Industry - Regional banks -19.58% 0.2241 -0.9449
Currency - Swiss Franc -4.39% 0.0601 -1.0438
Currency - GBP Sterling -8.2% 0.0814 -1.2297
Industry - Home Construction -40.52% 0.2720 -1.5327
Currency - Japanese Yen -9.91% 0.0636 -1.8391
Annualized Performance in a Imminent Recession (Rf = 2.00%)
Return Std Dev Sharpe
Sector - Utilities 22.73% 0.1638 1.2397
Sector - Consumer Staples 15.3% 0.1441 0.9039
Sector - Financials 15.85% 0.2041 0.6643
Sector - Industrials 12.93% 0.1804 0.5929
Currency - U.S. Dollar 5.94% 0.0738 0.5211
Industry - Home Construction 17.28% 0.2967 0.5045
Sector - Materials 11.64% 0.2141 0.4405
Silver 12.35% 0.2799 0.3618
Gold 6.45% 0.1538 0.2828
Sector - Health Care 6.51% 0.1612 0.2733
Industry - Banks 6.87% 0.2033 0.2343
Sector - Energy 7.2% 0.2668 0.1905
Sector - Retail 3.95% 0.2657 0.0714
Industry - Regional Banking 3.28% 0.2096 0.0592
Industry - Regional banks 3.28% 0.2096 0.0592
Currency - GBP Sterling 2.11% 0.0985 0.0094
Bechmark (Wilshire 5k) 1.27% 0.1799 -0.0404
Physical Energy 0.11% 0.2848 -0.0654
Gasoline -1.56% 0.3602 -0.0974
Currency - Swiss Franc 1.16% 0.0777 -0.1085
Sector - Consumer Discretionary -0.8% 0.2387 -0.1156
Brent Oil -5.11% 0.3487 -0.2002
Sector - Technology -4.42% 0.2762 -0.2285
Currency - Euro 0.28% 0.0736 -0.2312
Currency - AU Dollar -1.23% 0.0993 -0.3205
Industry - Oil & Gas Exploration -11.4% 0.3664 -0.3588
Commodity Index -6.05% 0.1948 -0.4058
Soybean -6.52% 0.1854 -0.4511
Weat -14.15% 0.3014 -0.5257
Currency - Japanese Yen -3.11% 0.0944 -0.5328
Currency - Canadian Dollar -1.77% 0.0664 -0.5583
Agriculture -7.37% 0.1545 -0.5955
Corn -10.75% 0.2098 -0.5966
Natural Gas -34.93% 0.5532 -0.6548
Currency - Emerging -2.92% 0.0692 -0.6993
Oil -21.7% 0.3315 -0.7014
Note

The current stage of the business cycle is stage 6 which is a imminent recession.

**

Business Cycle Stage Best performers

Return Std Dev Sharpe
Sector - Utilities 22.73% 0.1638 1.2397
Industry - Home Construction 17.28% 0.2967 0.5045
Sector - Financials 15.85% 0.2041 0.6643
Sector - Consumer Staples 15.3% 0.1441 0.9039
Sector - Industrials 12.93% 0.1804 0.5929

Annualized Metrics (Rf = 2.00%)

Important

Avoid the following equity classes:

Return Std Dev Sharpe
Corn -10.75% 0.2098 -0.5966
Industry - Oil & Gas Exploration -11.4% 0.3664 -0.3588
Weat -14.15% 0.3014 -0.5257
Oil -21.7% 0.3315 -0.7014
Natural Gas -34.93% 0.5532 -0.6548
Annualized Metrics (Rf = 2.00%)

Factor Expectations

By this point, you should know that economic factors play a vital role in estimating the future expectations of an asset. Each asset needs to be run through our machine learning regression model to assess what factors are essential and the future expectation for the help.

Relative Stregnth Analysis

Relative strength is a strategy used in momentum investing and identifying value stocks. It focuses on investing in stocks or other investments that have performed well close to the market or relevant benchmark. We use relative strength to confirm our assumptions about our expectations. We should see outperformance compared to the benchmark and peers if our assumptions are correct.

Rotation Analysis

A rotation chart can help identify the momentum of a trend. The top-left quadrant is a developing trend, just starting to unfold. The top-right quadrant is a developed trend. A weakening trend is in the bottom-right. And the last quadrant, the bottom-left, is a downtrend.

Relative Rotation, to the market

Zero iis the performance of Wilshire 5k, Above zero is performance in excess of the market, anything below is underperformance.

Rotation Chart

Rotation chart of Rate of Change, y and x axis is rotion of rate of change.

Trend Anlaysis

Trend following is a trading style that attempts to capture gains by analyzing an asset’s momentum in a particular direction. When the price moves in one overall direction, such as up or down, that is called a trend.

Trend traders enter into a long position when security is trending upward. An uptrend is characterized by higher swing lows and higher swing highs. Likewise, trend traders may opt to enter a short position when an asset is trending lower. Or, in our case, managing long-only, chose to avoid securities that are trending down. A downtrend is characterized by lower swing lows and lower swing highs.

Having predefined rules on what is and isn’t a trend also provides us with a method for controlling risk. We know at what price we would not consider being invested in a position. Following our trend system, we always know when we should cut our losses.

Trend Table & Rolling Performance

Rolling Performance
Trend Efficiency Ratio One Month Three Month Six Month One Year Drawdown
Sector - Health Care 0.19 5.23 11.33 6.48 6.61 -2.54
Currency - Swiss Franc 0.06 6.64 3.66 2.15 -2.27 -3.84
Sector - Energy -0.28 -0.62 11.16 5.02 61.38 -4.65
Sector - Consumer Staples 0.24 6.45 4.93 5.22 5.99 -5.1
Sector - Industrials 0 8.56 9.19 11.6 -1.54 -5.14
Currency - Emerging 0.04 5.12 2.25 -1.23 -1.64 -5.29
Soybean -0.1 -0.4 1.15 -3.23 25.11 -6.96
Currency - Canadian Dollar -0.03 1.1 -2.79 -4.85 -5.47 -7.96
Currency - U.S. Dollar 0.07 -5.96 -3.09 3.37 9.38 -8.22
Currency - Euro 0.16 6.59 5.06 -1.68 -7.35 -8.95
Sector - Utilities -0.12 5.95 -5.08 -4.01 3.8 -9.19
Sector - Materials 0.05 12.78 9.71 -0.07 -3.23 -9.26
Currency - GBP Sterling 0.16 7 5.33 -2.36 -7.52 -10.8
Currency - AU Dollar 0 6.3 -0.83 -4.09 -3.76 -11.29
Industry - Oil & Gas Exploration -0.12 -3.5 3.17 0.14 50.78 -13.35
Gold -0.01 8.99 4.21 -3.36 0.63 -13.47
Agriculture -0.06 -0.95 -4.06 -9.97 0.3 -13.69
Sector - Financials -0.18 5.46 7.9 5.09 -6.94 -13.84
Silver 0.01 17.95 25.53 4.67 2.8 -14.5
Corn -0.09 -6.78 -4.58 -9.43 20.12 -14.69
Currency - Japanese Yen 0.14 10.18 3.04 -5.61 -16.02 -16.22
Commodity Index -0.16 -1.61 -4.49 -11.5 26.46 -18.11
Industry - Regional Banking -0.08 -0.06 1.4 3.23 -10.02 -18.86
Industry - Regional banks -0.08 -0.06 1.4 3.23 -10.02 -18.86
Industry - Banks -0.11 0.72 1.98 3.29 -10.67 -19.19
Physical Energy -0.07 -5.7 -9.38 -12.42 45.84 -23.04
Brent Oil 0.04 -8.42 -8.72 -13.22 43.34 -23.24
Sector - Technology -0.05 6.75 -0.9 1.3 -18.8 -23.54
Oil -0.13 -4.49 -7.46 -15.32 38.27 -24.25
Industry - Home Construction -0.12 9.25 7.89 6.68 -24.23 -26.54
Sector - Retail 0.02 6.35 3.79 5.98 -27.65 -30.05
Gasoline -0.01 -9.75 0.27 -20.11 46.85 -30.83
Sector - Consumer Discretionary -0.05 2.38 -7.07 3 -27.72 -31.09
Weat 0.26 -15.43 -8.3 -32.25 -0.13 -39.37
Natural Gas -0.23 1.27 -39.24 -37.5 58.34 -44.7
Drawdown is calculated from the 52 week high, less current price. The draw down will not reflect a loss that is longer than one year. Trend is based off our own propritary trend follwing model.

Summary

To build a tactical portfolio, we need to understand and set expectations. We start with our macro and factor models. We then need to confirm our assumptions with a relative strength analysis. Finally, we want the ability to control the downside risk when things do not go as expected. We use a trend analysis that sets the point that we will exit no matter what.

E(r) Business Clycle E(r) Factor Relative Rotation Absolute Rotation Trend Efficiency Drawdown
Sector - Health Care -2.54
Currency - Swiss Franc -3.84
Sector - Energy -4.65
Sector - Consumer Staples -5.1
Sector - Industrials -5.14
Currency - Emerging -5.29
Soybean -6.96
Currency - Canadian Dollar -7.96
Currency - U.S. Dollar -8.22
Currency - Euro -8.95
Sector - Utilities -9.19
Sector - Materials -9.26
Currency - GBP Sterling -10.8
Currency - AU Dollar -11.29
Industry - Oil & Gas Exploration -13.35
Gold -13.47
Agriculture -13.69
Sector - Financials -13.84
Silver -14.5
Corn -14.69
Currency - Japanese Yen -16.22
Commodity Index -18.11
Industry - Regional Banking -18.86
Industry - Regional banks -18.86
Industry - Banks -19.19
Physical Energy -23.04
Brent Oil -23.24
Sector - Technology -23.54
Oil -24.25
Industry - Home Construction -26.54
Sector - Retail -30.05
Gasoline -30.83
Sector - Consumer Discretionary -31.09
Weat -39.37
Natural Gas -44.7