Reallocation, possibly take some cash off the table

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Since moving long back into the TSP funds in February, I've not advanced much -- about 1%.  I'm 100% exposed here, with nothing in the G-Fund (cash).

Risk is higher than it's been since November.  Here's a chart that I posted yesterday in my other blog:

As with all my images, right-click on it to open in a new window or tab.

The chart shows a ratio of anticipated risk.  In the numerator we have an ETF, the VXZ, which is a longer-term measurement of anticipated risk in the markets, determined by longer-termed "greeks" on option prices.  In the denominator we have an ETF, the VXX, which represents the volatility index .VIX, which is the anticipated volatility in the next 30 days.

When the VXX is dropping in value, the market feels there is less risk, and typically, they are right.  When the VXX falls faster than the VXZ, the shorter-termed view is bullish and the graph moves upward from lower left to upper right.  When the market starts pricing in more volatility the VXX grows faster than VXZ, causing the chart to fall.

This is the situation that we are in now.

The chart above is a weekly chart, simply to filter the day-to-day noise out.  As you can see, I've placed a moving average along with the ratio, and that moving average *just* started to point downward.  This isn't good for our portfolio.  When this points up, and does so conclusively, we know that we will continue to be in a bull.  We still are, but the bull is getting tired.

The graph at the top of the chart is the slope of the moving average in the chart.  It shows when this ratio of VXZ:VXX is off to the races, and it also shows when it slows.  Your eye can see that it pays to watch this, as  we don't know what the right side of the chart will look like next week, next month, or next year.  When it falls below 0 that is a clear warning of heavier seas, and visibility to calmer seas disappears.

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It's the end of the month, and by my records, we have a reallocation chip left on the table.  It has to be executed today by 12:00 EDT, or if we do it tomorrow, it will count as one of our moves in March.

If you play the 4-Fund/4-ETF game (F-Fund / AGG, I-Fund / EFA, C-Fund / SPY, S-Fund / VXF), then here are your allocations going into March:

• F-Fund / AGG:  9%
• I-Fund / EFA: 22%
• S-Fund / VXF:  41%
• C-Fund / SPY: 28%

This does not account for cash, e.g., there is no provision to put 25% or 50% or 75% in cash.  The allocations above are fully invested.  Decrease each percentage as you see appropriate.

If you play the 3-Fund/3-ETF game (no F-Fund / AGG), then here are your allocations:

• I-Fund / EFA: 19%
• S-Fund / VXF:  52%
• C-Fund / SPY: 29%

I fall into this latter camp, as there simply is no compelling reason for me to play the F-Fund/AGG over the long haul, as bonds typically underperform in a low interest rate environment.

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Trading Plan for Today

I intend to reallocate my funds according to the 3-Fund/3-ETF levels shown above.  I do not plan to move any allocation to cash, as my wife has a longer time frame than many of you and can withstand drawdown more than those of you who are retired or are thinking of retirement.  Your situation may be different, and given the VXZ:VXX ratio above, you may want to consider taking a portion of your monthly gains off the table.

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Remember, you are responsible for your own investment decisions, and I am not.  Please take ownership for your actions and please do your diligence.

Regards,

pgd

February 18th Weekend Update

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I generally look at the TSP funds on a weekend-basis rather than a daily; the signals simply do not change that often so daily review is often the first to go in my time-constrained world.

The F-Fund, represented by the ETF AGG, which is the iShares Lehman Aggregate Bond Fund, while having a poor weekly view (e.g., it's in avoid mode), has signaled a short-term buy as of this past Tuesday.  I don't play the F-Fund but for those of you who do, you may want to give it a review.  Note that it is at comparable levels to the May 2010 time frame, and we all recall that the May - August period was one of declining equity markets but increasing bond values.  It's a different world now, because of interest rates, so do your homework.

Undoubtedly, the question of allocation will come up.  First, let's look at the overall performance of 4 ETFs which represent the available funds within the TSP universe:

We can see that over the past month, AGG / F-Fund has been lagging, and is down -0.56% over the measured period.  We also see that the equity markets are continuing to move higher, which generally does not happen (e.g., equity and bond markets typically are out of sync).  So where is the money actually flowing?

For this, I use a tool called Effective Volume.  EV measures the movement of money flow in and out of a security, and does so based upon the size of the transactions that cause a price change.  Hence, a valid hypothesis is that if the equity markets are in trouble, we should see money flowing out of them and into the bond markets.  Let's have a look.

The EV site above does not track AGG, as it's not a very dynamic nor huge-volume ETF.  Another site has adopted the EV methodology and while there are some issues with this alternate site, the presentation will serve our purposes.  Here is what Monest.net has to say about AGG and other "TSP tracking" ETFs:

The bottom panel shows Large Effective Volume (LEV, red), Small Effective Volume (SmEV, blue), and total EV, (TEV, green).  What we see here for AGG does not support a new signal in AGG -- LEV is flowing out while SmEV is constant, even over the past few days, essentially taking away any confidence that a rally in AGG will be sustained.

Because of this flow out of AGG, I personally would not consider moving anything into AGG at the present time.

I urge you to research the charts for SPY (C-Fund), EFA (I-Fund), and VXF (S-Fund), as the results will be  instructive and should cause you to post a question or two.

Regards,

pgd

New Buy Signals for Monday, February 7th

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Over the past week the three primary funds of the TSP signaled entry.  Here is the 1-month performance chart of the 4 primary funds available with TSP:

Here is what my personal GGT system has to say about the TSP funds:

Essentially, we have long signals for the equity funds and we have cash signals for the bond fund.

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Here are the allocations going into Monday, February 7th:

3-Fund Portfolio

This portfolio invests in only the three primary equity funds, using the G-Fund as a safe haven.  This is an aggressive fund in that there is no bond component:

1. G-Fund:  0%
2. I-Fund / EFA:  46%
3. C-Fund / SPY:  29%
4. S-Fund / VXF:  25%

4-Fund Portfolio

This portfolio invests in all available equity and bond funds from TSP, and uses G-Fund as a safe haven.  This is a more conservative fund because of the bond component.

Note that the bond component is in CASH right now.

1. G-Fund / Cash:  7%
2. F-Fund / AGG:  CASH
3. I-Fund / EFA:  40%
4. C-Fund / SPY:  28%
5. S-Fund / VXF:  25%

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Your actual situation may be different so adjust your cash position/allocation percentages accordingly with your risk tolerance.  I do suggest keeping the same ratio though, as this has been proven in the past to optimize returns.

My trades will be effective the evening of Monday, Feb 7th.  I am a 3-Fund Portfolio person ...

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Remember, you are responsible for your actions, and I am not.  Please do your diligence, and please take ownership for your decisions.

Regards,

pgd