A Comment -- General Comments From an Expert (A Commentary)

Strategic Asset Allocation VS Tactical Asset Allocation

Strategic asset allocation (SAA) is a long-term asset allocation plan which considers an investor’s risk profile, financial goals, time horizon, and liquidity needs. The investor typically sets target allocations for various asset classes and rebalances the portfolio periodically. SAA considers both factors (human capital and financial capital) of capital that drive the total economic wealth of an investor. Human capital, simply put, is the present value of one’s future labor income. It is essentially a sum of predictable future income earned over one’s life. Financial capital on the other hand refers to savings and investment.

Tactical asset allocation (TAA), on the other hand, is a short-term deviation from the strategic asset allocation based on factors such as short-term sector view, a temporary hedge, economic conditions, valuations, or market cycles. TAA works by actively shifting asset allocations to take advantage of trends or perceived arbitrage opportunities in asset classes. Any deviation from SAA is a form of risk, and TAA decisions would be considered successful if the TAA generates higher risk-adjusted returns compared to SAA.
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2025 is the Year of the Snake. Interestingly, there have been a lot of market corrections in the Year of the Snake, including 1929. 

Looking at a chart of the DJIA going back to 1884, you can see a trend channel. Basically you get to the top of the channel, and it regresses to either the bottom or somewhere in the middle. In math courses you learn that there's an average, and you can get offside to the upside of the average, or offside to the downside. In the end, the average is right up the middle. You regress, or pull back, to that average. 

Since the big correction in 2009, we've been averaging ~15% annualized. Prior to that, it was a 10% annualized return on the Dow. In particular, since 2017 returns have been way outside what's normal. Therefore we should, at some point, see a correction. That's his overarching thesis.

US and Canadian banks have similar patterns. He's been trading the banks and is now almost entirely out, down to ~1% banks. Looking at the TSX bank index, you can see that the old high back in 2022 is being tested. All the momentum indicators show that everything got overbought, and we're hitting old resistance. Seasonal period for banks ends right around the end of December.

So he doesn't favour the banks right now, due to seasonal and technical reasons and not fundamentals.

When you see a stock or market that's been going down, and then the momentum indicators pick up, it's called positive divergence. The opposite, price momentum slowing down, is a bad thing.

Lots of stuff has pulled back in the past week or so. Markets are just now coming to the end of the so-called "Santa Claus" rally, which is supposed to be the last 2 weeks in December and first 2 trading days of the new year. Anything can happen in that period. The market's overbought status may become more exposed as we go forward.

No, because a lot of that is quick, intraday stuff. The larger crowd, and bigger money (pensions, big institutions), has a longer-term outlook for a stock. They're the big market movers. He uses technical analysis to analyze patterns to determine their outlook for a stock. He can also look at the big-order trading by those players compared to the retail orders -- "smart money vs. dumb money".

He wouldn't spend a lot of time worrying about all the black-box programs, they really just add volume. They absolutely affect your buys and sells, but they don't affect the longer-term trend.

He allows a stock to go through support for a few days. Those are called spikes or tails. But if you see it bounce off of support, give it a few days and it can actually become a buy. In that case, it's proven that it's holding support.

If you're looking at a weekly chart (because he's a mid-term trader), you want a series of higher highs and higher lows. That's an uptrend. When you see a lower high and a lower low and a break at the 200-day MA, on either the market or your stock, you get out. That's the most important rule. 

If it's the market that's broken, you don't necessarily throw everything out, but you raise 30-40% cash by peeling off positions. This gives you all kinds of cash to buy cheap when the market starts moving up again. This system lets you reduce risk and make profits.

He's not a day trader, so is not going to make a decision based on one day's volume. Instead, he looks for patterns.

He does look at volume, as indicated at the bottom of stock charts. He's looking for confirmation of a move. If looking for a breakout, he likes moves off of the trendline, or a breakout from a consolidation. 

If you get a breakout, you absolutely, definitely want to see volume. One way to do it is to just look at the volume bars. But the way he likes to do it is to look at the money flow index (MFI). It's advance/decline x volume, with the momentum indicator of relative strength index (RSI) applied to it. Really, really helpful in helping him determine overbought, oversold, and if the move is legit. You can see examples on his blog.

It was due to the Fed.

The market always builds in expectations, sometimes like a spoiled child ;)  If it doesn't get not just what it wants, but more than what it wants, then it throws a little temper tantrum. So the market was priced for a perfect message, and the message wasn't absolutely perfect. There's not going to be as much softening in 2025 as hoped for.

For him, it's not the biggest issue right now. Rather, it's the overbought market.

Long-term base of support, and seems stuck there. It's only a trend if there are higher highs and higher lows (or lower highs and lower lows). Until it starts one of those 2 patterns, it's in consolidation. Not showing any signs of a real trend.

The only thing you can do with a stock that's in a consolidation is to swing-trade it.

Macros are really important to his team. His business partner does the fundamentals, but the macros they do are largely technical. It's the way he looks at risk. He tries to quantitatively measure how much risk the market has by looking at market sentiment, market breadth, and other big picture stuff.

When he sees that the market has a higher risk profile, he'll raise some cash and really start paying attention to the trend, expecting it to break down. Once he sees that, he starts moving out very aggressively.

Company Highlight: VersaBank (VBNK) 

VersaBank (VBNK) is a Canadian-based, digital-only bank focused on specialized lending and deposit services. Established as one of the first fully digital banks in Canada, it operates without physical branches, leveraging technology to keep overhead costs low and streamline services for niche markets, including point-of-sale (POS) financing and commercial real estate lending. It mostly operates in Canada, but has recently expanded some services into the US. 

Its stock price has recently seen strong momentum, up 58% year-to-date, and 125% on a one-year basis. It pays a small yield (0.4%), but both sales and earnings growth are expected to be strong in FY2025 and FY2026. Its historical growth rates have been robust, with a five-year sales and earnings CAGR of 16% and 19%, respectively. Net profit margins are expanding and with a market cap of $595.7 million and a reasonable valuation of 11.4X forward earnings, we think VBNK looks interesting here. 
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Know that markets always overshoot, whether to the upside or downside. The Trump Bump was such a huge move. So many unknown variables coming in the next year:  tariffs, inflation, and how many interest rate cuts. Today, the futures market is pricing in 1.5 rate cuts next year.

When you have valuations that robust, priced for 4 rate cuts, it's actually quite a rational response for the market to take a really serious breather. Thinks the markets will end up being OK, but it's an adjustment that they have to get used to. We were going from quite restrictive, to getting way less restrictive, to maybe pausing, to the possibility of an interest rate increase next year. 

Perhaps the market should have seen it coming, because there has been this inflation and an incredible wealth effect, as well as a very robust US economy.