VP Tactical Cookbook part 1: the key concepts

“Market timing, by the way, is a tag some buy-and-hold investors use to put down
anything that involves using your brain.” – Jeremy Grantham

In a series of blog posts we will share the key concepts and tools that drive our tactical investment framework (1-3 month horizon). The below is an excerpt from our January 2022 thematic report to clients.

There are two main concepts in our framework:

1) The Tactical Context determined by trend, sentiment and analogies to historical price action.
2) Buy/Sell Signals that are on or off at specific points in time.

We think of tactical models as complements to our primary work on cyclical (e.g. leading indicators) and structural (e.g. capital cycle) analysis. If the tactical, cyclical and structural outlooks are aligned, that would warrant maximum position sizes.

Long-term models don’t predict short-term moves. There are times when the long-term outlook is great, yet investors experience short-term losses.

Trend, Sentiment and historical Analogs give us an overview of the tactical environment. They are also less correlated to each other than popular indicators from technical analysis.

Our buy/sell signals are defined by patterns and conditions that give a probabilistic edge on price behavior.

Equity Index Signals look within the indices and activate when the collective behavior of index members meet certain conditions: VP Thrust, VP Selling Exhaustion, VP Hilo Crossover.

Cross Asset Signals apply to a range of markets because they only use price and volume data: VP Technical, VP Correction, VP Divergence, VP LPPL Climax, VP LPPL Breakout.

Maximum position sizes in Brazil equities were warranted in February 2016, with structural, cyclical and tactical models aligned.

Brazil equities were already very cheap at the beginning of 2016. Cyclical indicators like our China LEI and our Brazil LEI had started turning up towards the end of 2015. The tactical outlook was generally very poor through 2015. A few buy signals activated in January 2016 and the tactical outlook was fully bullish by February.

Get the full picture at variantperception.com

Source: Bloomberg, Macrobond, Variant Perception