Preparing For The Next Downturn

Summary

• The U.S. is in a recession.  The bear market rally is losing steam.
• Institutional and Retail Investors are increasing allocations to money funds.  Investors are deleveraging.
• Corporations are under pressure and bankruptcies are starting to increase.
• AGFiQ US Market Neutral Anti-Beta (BTAL) may be a suitable investment for investors wanting an additional hedge against a downturn without reducing exposure to equities.

Technical Indicators

The Moving Average Convergence Divergence (MACD) indicator shows that what I consider to be a bear market rally is fading.

Chart #1: Technical Indicators

Source: Created by the Author

Investment Model

It is no surprise that the Investment Model is cautioning to be conservative. The U.S. is in a recession. Following Howard Mark's philosophy, I choose to be more defensive and near Benjamin Graham's guideline of a minimum allocation to stock of 20%.

Chart #2: Investment Model

Source: Created by the Author Based on St. Louis Federal Reserve FRED

Smart Money

Institutional investors (Smart Money) and Retail Investors (Dumb Money) are both increasing allocations to money funds. A wise move in my opinion.

Chart #3: Money Fund Flows

Source: St. Louis Federal Reserve FRED

Free Cash In Margin Accounts

Investors are deleveraging by increasing the free cash in margin accounts.

Chart #4: Free Cash in Margin Accounts

Source: Created by the Author Based on FINRA

Corporate Health

Corporate Health is a composite of gross value added, disposable income, operating surplus, real output, profits, exports and sales. Bankruptcies have increased more than 25 percent since last year. I look closely at bond quality of funds that I own.

Chart #5: Corporate Health

Source: Created by the Author Based on St. Louis Federal Reserve FRED

Gold - iShares Gold Trust (IAU)

I already have 6 percent of my portfolio in gold (IAU) and am satisfied with this allocation.

Chart #6: Gold

AGFiQ US Market Neutral Anti-Beta (BTAL)

I've written about BTAL in "Small Investors Should Be Conservative Going Into 2020" for interested readers. It is designed to do well when low volatility funds outperform more volatile funds. I sold it when I started simplifying my portfolios. I have recently placed orders to purchase BTAL as conditions have worsened, in my opinion. I like it

Analyst’s Disclosure:I/we have no positions in any stocks mentioned, but may initiate a long position in BTAL over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

I am an engineer with an MBA nearing retirement and not an economist nor an investment professional. I am long all of the funds in the Model Portfolios. The information provided is for educational purposes and should not be considered as advice. Investors should do their due diligence research and/or use an investment professional. In September 2019, I began contributing to the Mutual Fund Observer monthly newsletter.