Thursday, August 30, 2012

T 3 Volatility...8.30.12

This is another look at the T3 composite price chart posted Monday.  Yesterday we looked at the similarity of XLV, XLU and XLP (health care, utilities and consumer staples) short term and this 2 year chart shows that correlation is the norm.  That's important when viewing the T3 component ranking because when these 3 amigos don't show up in consecutive order it typically signals an impending change in the equity/bond balance.

GLD is pretty much in a pattern class all to itself.
SPY, QQQ, XLE and IWM display the equities pattern at various volatility levels above XLV,XLU &XLP.
TLT, TIP and AGG display the bond pattern, again with various volatility levels.
Note that all components have increased in value over the past 2 years...another important factor in constructing any model portfolio and previously noted.  

At the same time, the safety net we build around the portfolio is the diversification of risk, which is typically accomplished by using non-correlated assets or sectors.  As can be seen in the chart above, that's easier said than done.  We could easily include ETFs reflecting the financials, materials, real estate, transports and retail sectors in the model to test that theory and I've spent many, many hours building and testing such trial and error portfolios.  The performance metrics on all such efforts are dismal compared with T3 and TAQK.

Will market dynamic change? Will adjustments need to be made to the portfolio to maintain our target equity curve?  Can the low drawdown risk profile be sustained?
YES to all 3 questions.  It just takes a little work and a little oversight.

Going forward next week we'll look the difference between a tactical and an adaptive approach to keeping our portfolio on the right track.