Specific Changes to the Publications - February 1, 2022

All of these changes that affect Diamond publication.

If you use the Sapphire publication, the ones most relevant to you are 3,4,5, and 6.

#1 - New Numbers for the Model Portfolios

The portfolios in Diamond now use a new numbering scheme. All of the Diamond portfolios now have sg (sleeve group) numbers between 200 and 299. This series of numbers - in the 200s - indicate that these portfolios use 2x leveraged stock ETFs, which magnify daily returns by two.

The second two numbers in the portfolio number (e.g., “35” in “sg235”) indicate the maximum allocation to the leveraged stock ETFs. For example, “Diamond|Onyx 35|65 (MAIN) sg235” is a Diamond portfolio and has a maximum of 35% in the 2x DJIA-linked ETF (i.e., DDM).

If you have been using…
  • sg218 as your long-term portfolio, its new number is sg235
  • sg118 as your long-term, its new number is sg250
  • sg131, use sg265, it is the most similar
  • sg147, you can see the weight for DDM on Part III, p1, in the box on the right

The numbers in the decimal place will help me keep things organized when we add tactical sleeves, discussed below. Without a tactical sleeve, the decimal is “.1”.

#2 - All Portfolios Have the Same ETFs

Every portfolio is now a mix of the DJIA-linked and Onyx sleeves. Because of this change all model portfolios have the same ETFs and it will be easier for you to use the target weights of a different model portfolio to adjust the aggressiveness of your account, which is the third change.

#3 - Another Tool to Manage the Aggressiveness of Your Account 

From time to time, I will recommend that you temporarily use the target weights of a portfolio other than the one you have selected to use long term. This will allow us to shift the risk profile without increasing cash levels as much as we have in 2021.

I will give guidance for how many steps to shift away and in which direction from your long-term portfolio. For example, if there is a “-1” in the field marked “Box #3 Portfolio Shift” in the middle of page 1, use the target weights of the model portfolio one step to the left of (i.e., less aggressive than) your long-term portfolio in the chart on page 1. On the other hand, if there is a “1” in that field on page 1, use the target weights of the model portfolio one step to the right of (i.e., more aggressive than) your long-term portfolio.

I will continue to give guidance on the additional level of Box #2 Cash to hold. Going forward, however, we will use this tool for adjusting aggressiveness less frequently. Note that as of this week, we are using BOTH “Additional Box #2 Cash” and a leftward [less aggressive] “Box #3 Portfolio Shift.”

#4 - Box #2 Cash and Box #3 Shift Will Be Guidance for Virtually Everyone

In the past, I have said my suggestion to increase Box #2 Cash is for those with short time horizons (less than, say, 7 years) and/or who are sensitive to losses. I have been aggressive in increasing cash levels for those people.

Going forward, the guidance regarding Box #2 Cash and Box #3 Shift are for everyone except those with very long-time horizons AND who want the simplest trading possible.

#5 – Tactical Sleeves (replacing theme portfolios and add-ins)

In the past, we have used different techniques to add theme-related ETFs. The first was making available an add-in sleeve in April 2020 that included a NASDAQ-linked ETF. The timing of this was good; the NASDAQ ETFs have performed well from then through the end of 2021. We also introduced model portfolios for separate accounts that included a commodity-linked ETF, which was also well timed for the markets over the last roughly two years. Unfortunately, those techniques were cumbersome for users.

Going forward, I will add the most important theme related ETFs directly into the main portfolios. When that happens, I will also update the Shares-to-Trade worksheet. These steps will make it easier for you to take advantage of the themes.

The ETFs most likely to be added are NASDAQ-, commodity-, and gold-linked ETFs. I have added to the weekly publication "sleeve profiles" that show the historical performance of the computer models and algorithms related to holding these ETFs.

The charts illustrate the performance for:
  • The sleeve that actively rotates among the ETFs listed
  • A comparative mix, which is either the
    • The most aggressive ETF held over the entire period, labeled buy-and-hold (B&H)
    • A “neutral mix” of all the ETFs (NM). The comparative mix for Onyx is an equal-weighted mix of all four of its ETFs.
The profiles also show the Macro MRI for these ETFs, which will help you see when we are likely to add or remove these ETFs. These profile pages can be found after the detail pages for the model portfolios.

I am monitoring other ETFs for inclusion as tactical sleeves. These include global stock markets, Bitcoin, and other low-variability stock sectors.

#6 – Easy Access to Shares-to-Trade Current Worksheet

You will find a link to a current Shares-to-Trade worksheet in the middle of page 1 of the weekly publication. This worksheet, like the older worksheet, incorporates the Box #2 cash feature. In addition, it facilitates use of the Box #3 Shift feature. I will update the worksheet when tactical sleeves are added.

#7 - Upcoming Change: Performance of Actual Accounts

With the changes mentioned above, it will be difficult for the current performance system to track performance for these different variables.  I’ll provide more information at a later date. 


Here is an example of what I will do this week in my Diamond account to adapt to these changes.



Weekly Note - January 26, 2022

1. Market Comment 

As mentioned in December, the Macro MRI for the DJIA is just beginning a downleg in its cycle, which takes away a key source of resilience from the stock market. This makes the market less likely to fully recover from bad news or negative economic events. Historically, the downlegs last a few months to a few years. My current projections of the Macro MRI suggest this downleg will last at least a few months. Please see this web page for a discussion of the terminology I use: https://focused15investing.com/language.

However, we are close to the bottom of the Micro cycle, meaning that the Micro MRI may soon begin to provide the market with resilience, which would last several weeks. As of last Friday, the Micro MRI was at the 21st percentile of its levels since 1918 and still in the downleg of its cycle. This suggests that the Micro MRI will reach its lower extreme in a week or so. The Plant/Wait/Harvest designations are heavily influenced by the status of the Micro MRI (https://focused15investing.com/plant-wait-harvest).

When the Micro MRI for the DJIA moves to its upleg, we can expect stock prices to be more resilient and more likely to move higher from where they are now – even if there is little long-term resilience (as indicated by the Macro MRI being in the downleg of its cycle).

This pattern - stock prices moving higher when the long-term trend is down - has different names in the industry, including “dead cat bounce,” “relief rally,” “sucker’s rally,” or “bear market rally.” These terms convey the fleeting nature of the rally. However, I prefer the term “counter-trend rally” because it emphasizes that the short-term rally in stock prices runs counter to the larger downward trend.

In my analyses of counter-trend rallies over the last 100 years for the DJIA, I have found that the rallies have often coincided with both (a) a Macro MRI in the downleg of its cycle and (a) a Micro MRI in its upleg. The burst of resilience in the Micro MRI is often enough to overwhelm the lack of long term (Macro) resilience.

During a counter-trend rally, there is a sigh of relief among investors that the recent declines weren’t worse. But when the short-term cycle ends, that relief gives way to anxiety as prices fall again – often to a level that is lower than where the counter trend rally began.

During the downleg of a Macro cycle that covers several quarters or years, there are likely to be multiple counter-trend rallies. Historically, the Focused 15 Investing approach has done well participating in the upleg of the counter-trend rally and getting out before stock prices fall and follow the long-term trend down.

    Current Situation

At the end of last November, the Federal Reserve announced that it would fight inflation and allow interest rates to increase. This event accelerated a change that was already underway in the markets and detected by the MRI.  I saw that the algorithms were likely to be out of sync with the projected stock market MRI conditions for the December 2021 through early February 2022 period.  I concluded that there may not be enough time for the models to become better synchronized before prices fell. I decided to take steps to reduce the aggressiveness of our accounts by increasing the suggested levels of cash. My caution at that time may prove to have been too conservative if prices rebound sharply from where they are now (1/26/2022) and move higher, but I believe the probability of that happening is low. The Federal Reserve, which in the last has taken steps to calm the markets has indicated that it is less willing to do so. Plus, the Macro MRI is more solidly in the downleg of its cycle.  

With the end of Covid-related stimulus and expectations for higher inflation and interest rates that have not been experienced for decades, the markets will need to recalibrate on many levels. We are in the period of recalibration that I mentioned in early December: https://focused15investing.com/blog/f/after-near-term-recalibration-stock-market-is-likely-to-do-well.

The current plan is to follow the models and algorithms to participate in any counter-trend rallies, but do so with higher levels of Box #2 Cash and/or a shift to Box #3 Target Weight shift. We will be looking for a more definitive bottom in the stock market before shifting to a more aggressive stance.

    Trading the Micro MRI

We are now in a market with low long-term resilience; the Macro MRI for the DJIA is in its downleg. The DJIA can move higher than it is now, but those gains are likely to be temporary. Other major stock indexes are currently in the same condition. The current conditions appear similar to the period from 2000 to 2003. This period was when the Dotcom bubble deflated. The Macro MRI was in the downleg of its cycle during this entire period. Let’s take a closer look at that period.

As shown in chart 1, the DJIA dropped about 34% from January 18, 2000 to the bottom in October 7, 2002 (light blue line in chart below). The NASDAQ (black line) peaked a little later, on March 9, 2000. It lost 80% of its value through October 7, 2002.

Chart 1: DJIA and NASDAQ Performance 11/30/199 through 1/24/2005

Focusing just on the DJIA during the period 2000 to the market bottom in 2002, one can see that the declines of that period did not happen all at once or consistently over this 2+ year period. The long-term decline was punctuated by short-term declines and recoveries. These can be considered counter-trend rallies.

Chart 2 (below) shows the DJIA x2 Loss-Avoiding (blue line) and the Onyx (purple line) sleeves from January 2000 through late 2005 on a log scale. One can see that the DJIA sleeve (blue) generally increased over time through to 2003. Onyx (purple) did as well. The entire chart is shown in Note 1.

Chart 2: 2000 - 2006 - Traded DJIA Loss-Avoiding and Onyx Traded Sleeves 

A sharp decline in the NASDAQ and other growth sectors may be underway now, just as in the 2000-2003 period, but additional dynamics are affecting the markets. It appears that both inflation and interest rates are beginning rising trends. The last time we had high interest rates and inflation was in the 1970s and early 1980s.

Our DJIA loss-avoiding sleeves did well during the period of high inflation and interest rates, as shown in the ellipse in Chart 3 (below), which is on a log scale. The performance of the DJIA Loss-Avoiding sleeve is shown below by the green line from 1966 to last Friday. The performance of the DJIA is shown by the red line. A vertical line is shown at the date 1/7/2000 for reference.

Chart 3: Traded DJIA Loss-Avoiding 1966 though Early 2022

During the period highlighted by the ellipse, the algorithms were responding to changes in both the Macro and Micro MRI. The green line moves higher in a stairstep manner when the approach buys low and sells high on the MRI. The results from the approach are positive – the green line moves higher while the red line moves horizontally.

Viewing the long-term history of the DJIA and our investment approach, the approach does well when the market is not in a strong ascending trend. One can see the strong ascent of the DJIA in the late 1990s – just to the left of the vertical line. The approach had positive returns but these returns were not as strong as simply holding the DJIA (red line).

The Onyx sleeve does not go back to the 1970s (because of data limitations), so we cannot make similar comparisons for Onyx. However, many investment strategists believe the Consumer Staples sector of the S&P 500 (ETF “XLP), which is one of the four ETFs in the Onyx sleeve, is likely to do well during times of inflation. See Note 2, below for a recent reference to this sector.

The current situation may be more complicated than the two periods discussed, but I believe the markets will adapt. The important point to keep in mind is that we need to stay engaged with the stock, bond, and other markets over time. Investing is a very good way to protect and enhance our wealth in times of inflation - even periods of low inflation. The importance of investing in stocks is discussed in my December post: https://focused15investing.com/blog/f/after-near-term-recalibration-stock-market-is-likely-to-do-well.

2. Changes to the Publications

In order to navigate this market landscape more successfully, I will implement a few changes to the publication at the next Plant season. Many of these have already been made in the Sapphire publication.
  1. Theme-related ETFs will be included in the main model portfolios, with the most likely near-term candidate for inclusion being the commodities ETF GSG.
  2. All portfolios will be a mix of a DJIA Loss-Avoiding sleeve and the Onyx sleeve, which will make it easier to temporarily use a more or less aggressive portfolio.
  3. We will have two methods of adjusting account aggressiveness – increasing cash levels and temporarily using a different model portfolio.
  4. Current Shares-to-Trade worksheets (one for the Diamond newsletter and one for the Sapphire newsletter) will be linked to each weekly report for ease of access, and I plan to revise these sheets when a theme ETF is added or removed.
I will describe these changes in more detail when they are implemented.

Please contact me with questions or if you have any concerns about these changes.



1. Traded DJIA Loss-Avoiding and Onyx Traded Sleeves (log scale)

2. “Here's Why You Should Invest in Consumer Staples ETFs” - Investors can consider putting their money in non-cyclical consumer staples amid an economic recession. This largely defensive sector is found to have a low correlation factor with economic cycles. Read in Entrepreneur: https://apple.news/A-f2mDy4MSwmJ40D6KasUqw