Although there was a rally in market values this week, we do not yet feel that there is enough information to decide to enter Guardian portfolios back into the markets. Guardian portfolios are designed to protect and guard an investors’ assets. An investor who was with us from Feb would have had relatively minor losses compared to the market and we are continuing to work to preserve their capital. If an investor is interested in a buy and hold position, then we have decided to maintain Heritage and Green Path asset allocations without any further changes.
As Guardian portfolios are based on momentum data, we are checking momentum indicators and having investment committee conference calls daily. The unusual circumstance of the sharp fall, does make it harder for the technical indicators to pick up a change in direction and at the moment none of the technical indicators are picking up any upward rise in momentum – even the shortest ones which we would normally not consider using. They are all still suggesting that the overall trend is downward, which compared to the past few months is still true.
At this point, the markets are swinging so much and there is much volatility, we are not in a position yet to make a decision. We have discussed going back into 1/3 of the asset allocations, but with the markets in the UK and Europe dropping again today, have decided to wait until we have a better and clear signal of upward momentum. We do not want to be making decisions based on reactions to short term movements in the markets and want to stick to clear rules that we can both explain and follow. We will be testing shorter trend following rules to try to catch the markets as early as we can while still feeling like we can justify the decisions. Typically, using shorter technical indicators can lead to whipsawing, which would mean that we would be trading in and out too frequently in the markets and often timing the markets incorrectly.
There is reason to believe that markets could pick up in the near term with all of the government and central bank support, but at the present time Europe and the US are still suffering large daily increases in Covid-19 infections with little evidence of a slowdown in infection rates. Although President Trump is hoping to get the economy going by Easter, as the numbers of deaths rise, state governors are making calls themselves to keep their state’s economies closed as evidenced by the startling and exceptionally large 3.3 million US unemployment claims. There is still a lot of uncertainty surrounding the current environment and as we have never come across anything like this in the past, it is hard to base judgments on past experiences and, we feel, it is still too early to make a call as to the full implications of Covid-19. Investors will probably need to see evidence that the containment policies in the worst hit countries in Europe are reversing the trend in infection rates before they believe this is not going to be a long-term problem.
In many respects, much of trend-following approach is based on investor behavioural psychology. As markets go up, there is confirmation bias and investors buy; as markets go down investors can be reluctant to sell at reduced prices locking in a loss; and when markets start to recover, investors can be wary of joining in too soon. Now, we are waiting to ensure that any upward momentum is in fact a trend which investors will continue to believe in. This may mean that if and when the markets are picking up, we might miss some of the early increase in values until we are sure that there is upward momentum. But, if the markets continue downward, then we will watch, check daily, continue our daily investment committee meetings, and wait until we are sure that there is change in momentum.
This week we have also been discussing our position on Heritage and Green Path portfolios. We decided on Monday that we should follow the technical indicators as we have for Guardian. In the past, we have considered using trend-following indicators for these portfolios as well but have always been inconclusive as to what our position would be on them. After deciding to follow the technical indicators on Monday, we reversed that decision on Wednesday. We decided that we did not have enough research or fully established rules for these portfolios and have concluded that we will continue to maintain these as buy and hold positions for now. They will therefore continue to ride the market and overtime we expect these portfolios to fully recover their values as markets recover.