As discussed in the videos, my model is unique. It does not work off price, it works on volatilities and spreads between asset classes and within asset classes. Therefore it scores the various segments of the equity market and determines the direction of spreads, as well as the direction of spreads between asset classes such as bonds and equities. It ranks thousands of daily spreads and comes up with one RISK score.
This still leaves us with several questions:
- Can the model be whipped around?
Of course it can, but it is unlikely that it can keep on being whipped around. If the inter-asset relationships change so much, there must be a reason for it. If volatility increases and drops and then increases again, there must be a reason for it. Ultimately the trend will become clear, even if there are short term false starts. Since the model largely ignores daily changes by working off longer term moving averages, it is highly unlikely that whips can persist for very long. Statistically, the likelihood is almost zero. When I say very long: I mean a period of years, not weeks or months.
- Is TLT the perfect Risk Off asset?
No, probably not. TLT has been a great risk off asset with a high degree of negative correlation to SPY for many decades. But the truly ideal risk off asset is cash or something shorter than TLT, like SHY (2-3 years). It is quite possible that Risk Off will develop purely because of a disaster in TLT. It is quite possible for risk parity to blow up and for TLT to go down even faster than SPY during risk off. The model uses TLT because of its historical significance, but I tend to place a large proportion of assets in SHY or cash during risk off, waiting for an opportunity to redeploy. This is not an excuse, I will discuss it regularly in the Member Blog and my views about TLT have been clear for months in my videos. This is a tough time for TLT: budget deficits and rate increases are doing their job. But the same happened in 1987, 1999 and in 2007 and eventually TLT followed the path of SHY and the rest of the curve. With a delay, but the eventual moves were brutal. To summarize: if you want less risk, stick with SHY, you will not go far wrong. But I would still wager that over years and decades, TLT will still perform as it should: with a very high negative correlation to SPY, albeit with lags.