Elastic Asset Allocation — Legacy Offensive (EAA-LEG-OFF)
Developed by Keller & Keuning · Breadth Momentum · Med-High Risk
The Legacy Offensive variant of Elastic Asset Allocation merges two of Keller's most important innovations — the elasticity-based scoring from EAA and the breadth-based graduated protection from PAA — into a single unified framework. Published as part of Keller and Keuning's broader research on generalized momentum (SSRN #2759734), EAA-LEG-OFF applies the offensive elasticity composite to a twelve-asset equity-focused universe while using the PAA breadth mechanism to continuously scale the defensive allocation based on the count of assets showing positive momentum.
The offensive composite multiplies each asset's return by a diversification adjustment derived from its correlation with other universe members: z = r × (1 - c), where r is the trailing return and c is the average correlation. This scoring rewards assets that combine strong momentum with low correlation to the rest of the portfolio, naturally selecting positions that contribute both return and diversification. The multiplicative structure means an asset with zero momentum receives a zero score regardless of how diversifying it might be — return momentum remains the primary requirement for selection.
The twelve-asset universe spans a broader range than the original EAA's seven-asset universe, incorporating US large caps (SPY), US tech (QQQ), US small caps (IWM), emerging markets (EEM), Japanese equities (EWJ), European equities (VGK), real estate (IYR), commodities (GSG), gold (GLD), high-yield bonds (HYG), investment-grade bonds (LQD), and long-term Treasuries (TLT). This expanded universe provides the elasticity scoring with more building blocks and the breadth measurement with more data points, improving both the asset selection quality and the crash protection sensitivity.
The integration of PAA's breadth mechanism means the portfolio's defensive allocation scales continuously with market conditions. As more assets fall below their moving averages, a proportionally larger share of the portfolio shifts to safe havens. This graduated defense avoids the binary whipsaw problem while providing meaningful protection during sustained declines — combining the best properties of the two parent strategies into a cohesive system.
How It Works
Offensive Elasticity Scoring
Each month, all twelve assets are scored using the offensive elasticity formula: z = r × (1 - c), where r represents the asset's trailing twelve-month return and c represents its average pairwise correlation with all other universe members over the same period. Assets with high returns and low correlation score highest, while assets with either weak returns or high correlation are penalized.
The multiplicative structure ensures that neither factor alone can produce a high score. An asset with a 20% return but 0.9 correlation would score 20% × 0.1 = 2%, while an asset with a 10% return and 0.2 correlation would score 10% × 0.8 = 8% — the lower-return asset ranks higher because its diversification value more than compensates for its more modest momentum. This mechanism naturally steers the portfolio away from crowded trades where multiple assets are moving in the same direction.
Breadth-Based Graduated Protection
The PAA breadth mechanism counts how many of the twelve assets show positive momentum (using the 13612U composite or SMA filter). This count is converted into a crash protection fraction that determines what share of the portfolio shifts to defensive assets. When all twelve assets are trending positively, the defensive allocation is minimal. As breadth deteriorates, the bond allocation increases smoothly and proportionally.
The sensitivity parameter controls how aggressively the defensive allocation scales. The legacy offensive variant uses a moderate sensitivity setting that begins meaningful defensive rotation when approximately half the universe shows negative momentum. This positioning allows the portfolio to remain substantially invested during minor corrections affecting only a few assets while building meaningful defensive positioning during broader market weakness.
Selection and Allocation
The top three assets by elasticity score receive equal allocation within the risk-on portion of the portfolio. The equal weighting across three positions provides reasonable diversification while maintaining enough concentration to benefit from the elasticity scoring's quality selection. The defensive allocation is distributed between short-term Treasuries (SHY) and intermediate bonds (IEF) based on their relative momentum, providing adaptive defense that favors whichever safe-haven instrument is performing better in the current rate environment.
The combination of correlation-aware selection with breadth-based protection creates a dual-layer risk management system. The elasticity scoring reduces portfolio concentration risk by penalizing correlated holdings, while the breadth mechanism reduces overall market exposure during periods of widespread weakness. These two mechanisms operate on different types of risk — the first on portfolio-specific concentration risk, the second on systematic market risk — providing complementary protection.
Explore Elastic Asset Allocation — Legacy Offensive (EAA-LEG-OFF)
See the full backtest across 18 years of market data, or run your own what-if scenarios by adjusting all research parameters.