Active Strategy Review & Insights

Overall, how did the strategy do? What was the performance compared to expectations/benchmarks (overperform, underperform, etc.)?

The markets continued their decent in September, with most asset classes and sectors experiencing losses. The broad fixed income market (BB US Agg) returned -4.32% in the month as rates increased across the maturity spectrum. YTD the Agg is down 14.6%. The equity markets experienced significant losses due to investor concerns about inflation and central bank response. The US large cap market (S&P 500) returned -9.2% in September, bringing the YTD performance to -23.9%. Growth underperformed value by nearly 1% in the month and is one of the worst performing asset classes so far this year (-30.7%). Energy stocks experienced similar losses to the overall market (-9.6%) but are up nearly 45% YTD.  US small and mid-cap stocks performed in line with US large-caps for the month and are ahead ≈1-2% YTD. International developed equities performed in line with their US counterparts, while emerging markets equities underperformed by 2.5%. Latin American stocks continued their dominance and were only down 3.3% in the month.  The US dollar (US Dollar Index) was one of the few areas that was positive for the month (+3.2%) and is up nearly 14% YTD. 

With the steep selloff in September, all of the Core Satellite portfolios posted negative returns. On a relative basis, the strategies outperformed their benchmarks, with the Global strategies outperforming their Select counterparts.    

Why did we see this performance?

The “Core” portion of the portfolios performed in line with the market.  All of our equity ETFs posted returns in the -9% to -10% range, which was in line with the broader equity market (-9.9%). The “Satellite” portion of the portfolio significantly outperformed as the allocation to UUP (Invesco DB US Dollar Index Bullish Fund, which tracks the performance of the US dollar relative to a basket of six major currencies) outperformed the broader market (UUP was up 3.5%, while the broader market was down -9.9%).  On the fixed income side, the 70/30 strategies have been negatively impacted by rising rates.  However, on a relative basis, the portfolio outperformed the BB US Agg for the month given its shorter duration to the benchmark (4 versus 6.8 years).  On a YTD basis, IBD has outperformed the BB US Agg by over 3.3%.     

Are there any adjustments you plan to make to continue or correct this trend?

Our move to add exposure to the US Dollar in recent months has proven to be beneficial as equities and bonds have both been under pressure. There are no equity sectors that have technical indications for positive returns, so for now we will continue using UUP as exposure to the US Dollar for our satellite position.

What are 3 things you are monitoring right now for these strategies and why?

Our technical analysis is indicating that stocks are likely in for another steep decline, possibly equal to the entire decline we have experienced thus far in the year. There is significant technical weakness in the price charts for equities and bonds, so we advise investors to prepare themselves mentally to weather another sharp drop in asset prices – and also prepare themselves to take advantage of low prices as a buying opportunity when risk abates, trends flip positive, and the market rebounds from an oversold position. We will continue to monitor the market structure closely for such an opportunity, and until then we will keep as much of our powder dry with allocations to asset classes and sectors which we believe should fare better during the next expected leg down in the market.

Quadrant Interpretation:

·   Strengthening: Performance < benchmark but momentum is UP

·   Leading: Performance > benchmark, relative strength is UP

·   Weakening: Performance > benchmark, relative strength is DOWN

·   Laggard: Performance < benchmark and momentum is DOWN

·   Benchmark: S&P 500 (S&P 500 Sectors)

Last month’s TRM commentary noted that the preponderance of analysis “portends a very rough September and October for the market as we expect prices to accelerate with crushing downward momentum.” September indeed proved to be a harsh month for stocks, with the S&P 500 down nearly 10% for the month. The TRM strategies’ defensive positioning protected investors from the majority of those losses during the month.

Going forward, we anticipate a continuance of that downward slide in stocks, likely after a modest relief rally or possibly side-ways chop that serves to work off some of the oversold indicators in the market. But once the oversold condition is sufficiently reduced, we expect stocks to resume a sharp downward trend as they enter the steep middle section of an Elliot Wave Theory third-wave down.

Third waves are the longest and strongest waves in Elliot Wave analysis, which means if this view proves out it would likely be a larger decline than all of the decline so far this year. Last month’s downside target on the first leg down of this third wave was an approximate 15% drop to S&P 3400, which prices have gotten very close to already. The modest respite from the selloff ushered in at the end of September should prove to be short-lived and give way to the next leg down of wave three, possibly taking prices down to the levels we saw at the bottom of the COVID selloff of 2020 at approximately S&P 2200, representing another 30% or more decline from current levels.

The bright side is the potential trip to the COVID lows would not be a straight line down, but very likely would be interspersed with sharp, and possibly significant, bear market rallies. Should conditions for such rallies develop, the TRM strategy would seek to put money to work in such a way to benefit from these bounces in the context of a broader decline. Some signals that would indicate such a rally may have begun are bullish money flow divergences, where prices make a new low while money flow indicators do not. That shows that money is flowing into stocks during a bottoming event, which is one of the key ingredients necessary for a rally to take place.

That being said, until such indicators give the go ahead TRM will remain in a defensive posture, which currently is in shorter duration, high quality corporate bonds.

At Inspire Advisors – The Chandler Team, we focus on three main strategies that are diversified and actively managed “in house” by The Chandler Team. Below is an overview of how the strategies performed, what changes were made during the month, and what our expectations are for the month ahead.

How did the CW Active strategies perform for the month?

·   CW Active Protection: -0.70%

·   CW Active Balanced: -0.81%

·   CW Active Growth: -0.89%

How did the static blended benchmarks perform for the month?

·   DJ U.S. Conservative: -4.23%

·   DJ U.S. Moderate: -6.54%

·   DJ U.S. Aggressive: -9.18%

How did the individual holdings (assets classes) perform for the month?

·   US Large Cap Stocks (BIBL): -9.30%

·   International Stocks (WWJD): -7.96%

·   US Small/Mid Cap Stocks (ISMD): -8.79%

·   US REIT Index (USRT): -12.23%

·   US LT Treasuries (VGLT): -6.30%

·   US IT Treasuries (VGIT): -2.87%

·   US ST Treasuries (VGSH): -1.11%

·   US ST Treasuries FLT (USFR): +0.22%

·   Gold (GLD): -2.03%

·   Div. Commodities (GSG): -5.29%

·   Mortgage Back Sec. (RISR): +3.03%

What changes were made to the investment strategies during this month?

We decided to allocate the “defensive” portion of the models to two short term floating rate treasury funds.

We removed our gold allocation until the current trend reverses direction.

·We also decided to add an inverse S&P 500 fund to reduce our exposure even further to the stock market without fully selling our entire Inspire 100 stock position. Our plan is to remove this inverse position when our indicators move upward enough to indicate that the trend direction may be changing.

The out-performance of the models compared to the blended benchmarks is due to our more conservative positioning regarding stocks and real estate.

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What are our expectations for the month ahead?

We will keep our eye on the current trend direction and see if any asset classes change direction enough to warrant an increase in our allocations. Due to higher-than-expected inflation, interest rate increases (which we still believe will be higher than the FED is predicting), and possible recessionary pressures due to rising rates; we do not anticipate high returns for the more growth focused assets classes the remaining part of 2022.

We are researching other items to possibly add the models that would do well in rising interest rate situations as well as increasing inflation scenarios. If we find something that our team believes offers a good risk/reward opportunity, we will add it to the models in proportion to their expected risk offset potentials.

For the month of September, FEVR fell -9.58% vs -9.24% S&P 500 and -5.95% Momentum (MTUM). GLRY also retraced its steps -8.68% vs -9.17% S&P 400 Mid cap and-5.95% Momentum (MTUM).  While a challenging month, FEVR showed resilience in protective Consumer Discretionary allocations and Energy weight differentials. Weakness came from Healthcare investments, specifically pharmaceuticals, and a few Consumer Staple holdings.  In opposite fashion, the lack of Consumer Staples aided GLRY, along with outperforming Financials.  The overweighting of Real Estate proved to be the biggest headwind, even though the selection outperformed sector performance.

In this environment, momentum investors are facing an uphill battle.  During the month and past quarter, there have been complete roundtrips of gains and losses across different asset classes, sectors, and companies.  The reason the momentum factor has outperformed historically is that trends generally continue over long periods of time, which is not occurring right now as investors look for certainty in the commodities markets, geopolitical risks, and interest rates.  While uncertainty is low, our primary goal is to avoid major red flags in companies via our FEVRR process to protect idiosyncratic downside until direction returns to markets.  We will also remain pure to the factor, so that when direction does return, our methodology and investments can capture positive factor exposure.

Overall, how did the strategy do? What was the performance compared to expectations/benchmarks (overperform, underperform, etc.)? 

For the month, the Inspire Tactical Balanced ESG ETF (RISN) returned -1.31%. The fund outperformed the S&P Target Risk Moderate Index (AOM) by +4.50%, which returned -5.81% (according to folioinstitutional.com). We attribute this performance to the very conservative allocation that the fund held for the month with regards to the percentage of stock compared to treasuries and other protective asset classes.  

The management team diversified the “defensive” allocation of the fund into two different floating rate short term treasury funds, and we removed Gold for the time being. We continue to hold a 10% stock allocation of the Inspire 100 large cap index.

The overall stock market (S&P 500-SPY) decreased by -9.53% for the month. For the last twelve months, the Inspire Tactical Balanced ETF (RISN) returned -12.25% and has outperformed its benchmark (S&P Target Risk Moderate Index) which returned -16.62% (according to folioinstitutional.com). We attribute this outperformance to continued defensive position held by the fund so far in 2022.

What are 3 things you are monitoring right now for these strategies and why?

Item watching #1:  We continue to monitor the US Large Cap stock market to see if the trend/momentum remains in a downward direction. Our indicators seem to be pointing to a continued downtrend in the US Large Cap stock market for the foreseeable future, but we will monitor this allocation to see if an increase in exposure is warranted.

Item watching #2: We continue to monitor the price movements of gold. We removed Gold from the fund allocation as Gold has been in a downtrend according to our charting system. If the trend reverses, we will consider including Gold back into the fund.

Item watching #3: We continue to monitor the US Treasury holdings within the fund. We anticipate holdings reduced duration or floating rate treasuries for the foreseeable future as the trend of raising of interest rates seems to be something that will remain through the end of 2022.

Issachar lost -0.58% in August, while the IQ Hedge Multi-Strategy Index lost -3.85%, so Issachar outperformed its benchmark. Issachar held positions in solar, oil, and gas stocks, but they were not producing the expected results, so they were sold. Risk has been high, and the market was not rewarding risk-takers, so Cash is a good place to sit while the markets decline. Issachar is complacent in Cash, 100%!

This is a Bear Market and Recession, and it ain’t over yet! The market is discounting an inflationary bad 3^rd quarter earnings season, and looking ahead, it sees more of the same. Indexes trend higher when they see a clear path to earnings growth, but very few fundamentally strong stock charts look attractive currently. Even the best stocks that have held up well will likely get hit in the next wave of capitulation selling. It is not what you make in a Bull Market but what you keep in a Bear Market that truly allows one to invest/save for the long term. Last year and historical returns are irrelevant because it may be “different this time.”

The Fed is raising rates and decreasing its balance sheet at a record pace! What matters is tomorrow and how we are positioned to protect and grow your account. This Bear Market could last until we get new leadership in Washington. Avoiding life-changing losses and taking advantage of the next opportunity is my focus. After managing risk for over 32 years, I have seen the best returns occur after the steepest selloffs, so let’s prepare for a once-in-a-lifetime generational opportunity once this Bear Market runs out of gas. We must preserve mental and physical capital to take advantage of the next great opportunity, so let's be disciplined and respect risk. I believe patience will be rewarded; this is NOT a low-risk buying opportunity. Junk bonds are down about -16% YTD, indicating investors have lost their risk appetite. I have a protective/defensive posture at this time, but I will change when the charts change.

Issachar is down a little for the year, but the indexes are down a lot and could get much worse before the bottom. The S&P 500 (big caps) is down about -24%, the NASDAQ 100 (techs) is down nearly -33%, and the Russel 2000 (small caps) is down about -25% this year (all at yearly lows). 20-Year Treasury Bonds are down nearly -30%, so risk is high. Far-left “green new deal, climate change” socialist policies have hurt our economic recovery and growth chances, but there is always hope! If Constitution-loving people are elected in November, things could turn around, and America could become the beacon of hope it used to be. By God’s Grace, America was blessed with prosperity, His loving hand of protection is still on us, and I believe He will save us from a tyrannical socialistic government.  

The Fed has steadily reduced its balance sheet by $170 billion from a high of $9 trillion on April 19^th. They are doing what it promised, trying to slay the inflation dragon they helped create by “printing money out of thin air.” Loretta Mester, president of the Federal Reserve Bank of Cleveland, said a recession would NOT stop the Fed from raising rates. Wow! That is crazy talk! In other words, she may be telling us the Fed may cause a deeper recession before they are forced to reverse course. That means we should expect the Fed to “pivot” from Quantitative Tightening (QT) to Quantitative Easing (QE) in the future, so watch for it. In the meantime, don’t fight the Fed!

Bottom Line: Issachar shareholders are comfortable in Cash while the market trades below the June 16^th low area of support on above-average volume. The market is looking ahead and does not like what it sees, so it could drop hard and fast now that support has been broken. The Fed is raising rates to fight inflation in a recession, so I do not see this Bear Market ending soon. Please support and pray for Godly leaders to take charge in November to hopefully put us back on the right path to freedom and prosperity. My opinions do not matter. Everything known is in the price chart, so I rely on the charts to tell me what to do. Charts do not lie (people do), and the charts tell me to sit on my hands patiently. I see a great opportunity in the making, but we must protect mental and physical capital. Cash is King! Grace & Peace to Everyone!

The Lord is compassionate, gracious, slow to anger, and abounds in love. Psalms 103:8

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IMPORTANT RISK INFORMATION

Mutual Funds involve risks, including the possible loss of principal. An investment in the Fund may not be appropriate for all investors. The Adviser's judgment about the attractiveness, value, and potential appreciation of particular asset classes and securities in which the Fund invests may prove incorrect and may not produce the desired results. There is no guarantee that any investment will achieve its objectives, generate positive returns, or avoid losses.

Investors should carefully consider the investment objectives, risks, charges, and expenses of the Issachar Fund (LIONX). This and other important information about the Fund are contained in the prospectus, which can be obtained by calling 1-866-787-8355. The prospectus should be read carefully before investing. The Fund is distributed by Northern Lights Distributors, LLC, member FINRA/ SIPC. Horizon Capital Management Inc. and Inspire Investing are not affiliated with Northern Lights Distributors, LLC. NLD Review Code: 4086-NLD-10/03/2022