Looking at the various market segments, the telecom, transportation, and pharmaceutical industries were among the weakest areas since last quarter end while technology, energy, and industrials declined the most with a sell-off in November.
The underlying index’s model measures the overall health of the market through an evaluation of so-called market breadth, which refers to advancing and declining price trends and countertrends at the GICS2 industry level.
The index’s model follows a two-phase process. The first phase measures trend following and mean reversion within the S&P 500 industry groupings to determine a bullish or bearish market environment. Additionally, the model applies a risk filter process to ensure that all of the price-based industry level indicators are effective over time.
The second phase utilizes the scores taken from the first phase to produce the equity allocations of the index. When the index is not completely long or flat, either 80% or 40% of the portfolio will be allocated to the S&P 500, with the remainder allocated to the Solactive 13-week U.S. T-bill Index.
While investors may buy-and-hold various asset categories to diversify risk in case of a market pullback, a diversified portfolio may still ride the fall-out. Alternatively, investors can consider this long-flat ETF strategy as a way to directly limit against downside risk.
“Many investors may attempt to ride out this recent kind of volatility, relying solely on asset diversification to minimize portfolio loss,” Larson said. “However, should such spurts of volatility cascade into correction territory, or worse, investors can miss out on new opportunities to gain wealth by not taking steps to limit these types of losses. With a guided equity allocation strategy, investors can step out of the market automatically, in an attempt to help limit drawdowns and preserve capital, should markets continue to trend meaningfully negative.”