I recently had a discussion with a reader about the details of my UMTM. The UMTM is an extremely low turnover model that flashes signals once every few years and is designed to limit the extremes of the downside tail-risk of owning equities. When extreme downside risk is minimized, investors can afford to take greater equity risk. Instead of, say, a conventional 60% stocks/40% bonds asset mix, an investor could be more aggressive and move to a 70/30 or even 80/20 asset mix and revert to a more defensive posture such as a 40/60 or 30/70 asset mix under risk-off conditions.
In that context, the reader asked why the UMTM flashed a buy signal in February and flipped back to sell in March, even as the S&P 500 rallied to a new recovery high.
As it turns out, the UMTM was whipsawed by a trend-following model, which is an unfortunate feature of trend-following strategies. To explain further, let’s unpack the details of the model, which is based on a blend of trend-following strategies and a macro overlay.
The full post can be found here.
