Happy March 14th! No, it isn’t really a holiday, but there are some exciting things around the corner. A week from now, millions of brackets will be busted just hours into the NCAA basketball tournament, which is one of my favorite events of the year. People who haven’t watched basketball all year, can suddenly give you what sounds like a perfect breakdown of how the Horizon League conference winner can take down the good Power 5 team. Everyone becomes
an expert, which is my favorite part about March Madness. Everyone goes into that fateful Thursday with what seems like the very first perfect bracket filled out in bracket history, until about the 3rd game (if you’re lucky.) Even the brightest of college basketball minds have failed to reach that achievement. The chaos and randomness of the games at such a high volume create unpredictable scenarios, that make it all the more impossible that the perfect bracket will ever come.
And that is my poor segue into investing! While no investment is perfect, the experts who use the data are more likely to get the prediction right, rather than those who go into it with their gut -- both in investing and in basketball (that won’t stop my wife from picking Duke to win it all for the 7th consecutive year.)
For those of you who pay close attention to our investments in our models, you might have seen a drastic change in our EGA model over the past week. We have a lot of our different trading systems in play here, so here is a breakdown of all of these different changes:
Firstly, yes we are taking some equities off the table. This isn’t a hunch or SEM being scared of the current market, it’s simply using our data to determine how much we should actually be invested in (EGA still has quite a bit of equity exposure by the way.) So just keep that in mind when we discuss our changes.
Sector Rotation System
The first is our sector rotation system, which had a very curious mix of Latin America and Real Estate sector funds for much of February. Using our scoring of over 30 different sectors to invest, on March 1st we had scored that the best 2 sectors to hold onto were the dollar and utilities (as I’m writing this we are making trades to sell the dollar index to get back into real estate.)
Style Box Rotation
The second change was taking out some small cap exposure. This change simply occurred because of a change in the ranking “score” for small caps versus the other style boxes (and Treasury Bonds.) After holding small cap in that trading system since 2/22, we sold out of that on Monday. Again, this isn’t us thinking small cap is bad, it’s just us looking at the data we had and making a change based off of that, not emotions.
The last change occurred in our volatility system. Those changes were made March 7th as a reaction to the market maybe selling out a little stronger than it should have. That was a winning trade that served its purpose, but that of course is never a buy-and-hold strategy. That was sold out on Tuesday.
Hopefully this offers some clarification as to why these changes were made. SEM remains strong in its discipline to favor data to emotion, and that remains the case with these changes. And before you ask, we do not have a model to help fill out your bracket. If you are going to use your gut, please do it on a 12 seed and not an investment in a 3X Emerging Market ETF.