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Tuttle Tactical Management Weekly Research Notes


The market continues to defy gravity as we have broken through the September highs and are now charting new territory.

Equity Markets
Our momentum indicators are still extremely bullish on the stock market.  Our positive reading on stocks does not mean that the market is guaranteed to rise from here.  There are still many risks on the horizon (Poor corporate earnings, problems in Europe, slowing economy, partisan bickering in Washington, etc) that could cause a selloff. However, our research suggests that when our momentum indicators are bullish the rewards of being invested outweigh the risks.

In the US we continue to see the most strength in Mid-Cap stocks, with Small Caps second.  Globally, we see the most strength in China.  Our shorter term counter-trend indicators still show that the market is slightly overbought and hint that we could be in for some more consolidation before the next major move.  This week we put some of our cash to work during slight downturns buying US Dividend Paying Stocks and Small Cap Stocks.  Our cash positions are now 17-25% which will use to buy into any counter trend weakness   .

Fixed Income Markets
Our momentum indicators show the most strength in higher yielding areas of the bond market, particularly High Yield Corporate Bonds and Emerging Market Bonds.  Low interest rates continue to force yield seeking investors into the “riskier” areas of the bond market.  We fully understand that a lot of this momentum is an artificially created bubble created by the Fed’s low interest rate policy.  However, in an improving economic environment investors are more willing to take risk in the bond market.  Also, being tactical we are always ready to shift out of higher yielding bonds if the “bond bubble” bursts.

This week our Treasury Bond models diverged, one continued to be positive and the other went negative, causing us to sell our long positions.

Question & Answer
We got a great question from a client the other day:

Q: How does the very low VIX and high bullish sentiment augur for complacency and a potential setup for a nasty market fall early this year? Does this low VIX and complacency cause you to be more defensive?

A: We have done a lot of research on the relationship between the VIX (volatility index) and stocks.  What we found was that the trend of the VIX over the intermediate term has a relationship with stock prices as does the change in the VIX over a short term period, such as a week.  Over the intermediate term if the VIX is trending down stocks typically are moving up, and when the VIX is trending up, stocks are typically trending down.  The relationship over the short term is counter trend, over shorter periods, like 5 days, when the VIX has moved higher it is generally a good time to buy stocks, when the VIX has moved lower it is generally a good time to be selling stocks.  This dovetails with our core beliefs:

  1. Over the intermediate term if stocks are strong they tend to continue being strong and if stocks are weak they tend to continue to be weak.
  2. Over the short term markets are dominated by noise, fear, and greed, and frequently overreact on the upside and the downside, eventually snapping back into equilibrium.

The VIX is typically not a leading indicator, instead it is lagging or coincident, meaning that stock market upturns and downturns impact the VIX, not the other way around.  Therefore, over the intermediate term the VIX will generally be trending down if stocks are trending up and over the short term a big dip in the VIX could be the result of a market that is overextended.

So, does the VIX being so low impact anything we are doing?  No, because we already take the issues driving the VIX to these levels into account based on our core beliefs by combining intermediate term momentum analysis and shorter term counter trend analysis.

Top Holdings

  1. Cash
  2. Mid Cap US Stocks
  3. Dividend Paying Stocks
  4. Small Cap Stocks


Tuttle Tactical Management, LLC is an investment adviser registered with the U.S. Securities and Exchange Commission. You should not assume that any discussion or information contained in this letter serves as the receipt of, or as a substitute for, personalized investment advice from Tuttle Tactical Management, LLC. It is published solely for informational purposes and is not to be construed as a solicitation nor does it constitute advice, investment or otherwise. To the extent that a reader has questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional adviser of his/her choosing. A copy of our written disclosure statement regarding our advisory services and fees is available upon request. Our comments are an expression of opinion. While we believe our statements to be true, they always depend on the reliability of our own credible sources. Past performance is no guarantee of future returns.

Certified Financial Planner® Board of Standards, Inc. owns the certification marks CFP®, Certified Financial Planner® and federally registered CFP® in the U.S., which it awards to individuals who successfully complete the CFP® Board’s initial and ongoing certification requirements.

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