Industry Benchmark Performance
The Hedge Fund Industry posted good equity returns in April, but less than half of the SPY gain. Even a 10% gain after a 30% loss actually recovers only 7% of the drawdown, so there is still quite a bit to go. As we would expect, long-only funds were the best performers. While futures did not suffer from the decline in equities, neither has it posted gains during the rally. CTA performance has been surprisingly quiet, with mixed results for 2020.
Kaufman’s Fast Strike Systems on MetaStock
If you are interested in short-term trading, look at Kaufman’s Fast Strike strategies. Contact MetaStock at 800-882-3040 or go online to www.metastock.com/kaufmana.
Blogs and Recent Publications
Find this at the end of this report. We post new interviews and reference new articles each month.
April Performance in Brief
After being out of the market for about 6 weeks, we reentered the daily stock 10 portfolio on April 15 with two stocks, GILD and TSLA, followed shortly by KR and REGN. As of the end of April, the weekly 10-stock portfolio had a full complement of stocks, but the daily program has held only 5 stocks.
Our portfolio selection requires that stocks show good returns for at least 60 days, which still includes the major part of the Covid-19 sell-off. We should get more stocks available for selection as long as there is not another drawdown in the overall market.
Our benchmark 10-stock portfolio was fractionally higher in both the daily and weekly programs. The daily program is up about 5% for the year, and weekly up 12% for 2020. That’s compared to the SPY, which is down 8.5% for 2020, even after a good month.
Major Equity ETFs
It’s a recovery, but more for Nasdaq and less for the small caps. That goes along with the standard belief that investors avoid small caps during uncertain times. Nasdaq has fared best, with many of their stocks not impacted as much by Covid-19.
We continue to believe that stock prices cannot return to the old highs until business is back to “usual.” With less income, earnings must be less and value lower. The market can do anything it wants, but a move back to the highs anytime soon is a bridge too far.
CLOSE-UP: Where is the Cure?
Dozens of research labs are working on a vaccine or a cure for Covid-19. Among them are the NIH, John Hopkins, University of Oxford, Canadian Institute for Health Research, numerous smaller labs, as well as the major drug companies. So far, there are anecdotal reports of some success and some failures. As investors, is this the time to buy into the cure?
Let’s look at the companies that are most liquid, in alphabetic order: Allergen, Gilead (GILD), Johnson & Johnson (J&J), Eli Lilly (LLY), Merck (MRK), Pfizer (PFE), Moderna, Regeneron, and Bristol-Myers (BMY).
There are also the top pharmaceutical ETF (by volume), XPH, PPH, KURE, and PILL., and the healthcare ETF XLV. By weight: JNJ, UNH, MRK, PFE, ABT, BMY, MDT, and AMGN.
Then there are the largest companies that dispense, CVS, Walgreens, and Rite-Aid, followed by businesses that include dispensing among other products, Walmart, Kroger and Target.
SPY As of April 25
As a benchmark, SPY dropped 34% from its high of 336 at the end of February to 222 in late March. On April 25 it was at 282. The TV commentators will tell you that it is a rally of 27%, but then statistics can be used to exaggerate. The loss was actually 39% and the recovery is 20%, so we have still only recovered 53% of our loss. That is also clear from the SPY chart that has been adjusted to 100 on Oct 1, 2019.
Figure 1 SPY from October 2019
Let’s look first at four most liquid pharmaceutical ETFs: PPH, XPH, PILL, and KURE. KURE represents the Chinese pharmaceuticals. To understand the composition, PPH has AstraZeneca, Bristol-Myers, GlaxoSmithKline, Johnson & Johnson, and Eli Lilly as their biggest holdings (about 26%). We would expect those companies to be feverishly developing a cure and a vaccine for Covid-19.
Figure 2 shows that all four ETFs dropped with SPY, with KURE recovering to near break-even and PPH rallying the least. That seems to be a surprise because we would think that investors would be focused on companies that might develop a cure. The most reasonable explanation is that the performance of an ETF is always dampened by a large number of member stocks doing nothing. The returns of the ETF will not give you the profits that you are looking for.
Figure 2 Pharmaceutical ETFs
Looking for the Cure
Now we get to the companies that should be the focus of traders, the ones that may create a vaccine or develop testing equipment. These can be big pharma or smaller research companies. Figure 3a shows Johnson & Johnson (JNJ), Eli Lilly (LLY) Medtronic (MDT), Merck (MRK), and Pfizer (PFE).
Lilly is strong, followed by Johnson & Johnson, both higher than before the crash. The other three companies vary in their recovery with Medtronic tracking closest to SPY. The price is telling you which companies are benefitting, most likely through testing equipment or antibody procedures, but possibly anticipation of a cure or vaccine. The cure and vaccine are still just speculation.
Figure 3a Big Pharma
Other large companies are shown in Figure 3b. They are Abbot Labs (ABT), Amgen (AMGN), Biogen (BIIB), and Bristol-Myers (BMY). While Biogen seems to be jumping around without getting anywhere, none of the other companies are performing as well as either LLY or JNJ.
Figure 3b Four more pharma companies.
Last are smaller companies that are actively looking for solutions. They are Gilead (GILD), Regeneron (RGEN), and Moderna (MRNA). From Figure 3c we can see that the excitement is on Moderna. Unfortunately for our program, there is only one year of data, which is not enough to qualify for our portfolio. Both Gilead and Regeneron have been posting steady gains and are in both the daily and weekly portfolios.
Figure 3c Gilead, Regeneron, and Moderna
Mixed Purpose Companies
An interesting sector are those companies that can benefit from the Covid-19 crisis by providing essential services. The largest of these are Walmart (WMT), CVS (CVS), Kroger (KR), and Target (TGT). Target and Walmart have the advantage of selling clothing and household goods while other stores not considered “essential” are closed. Like Amazon, they also have a well-developed online presence. Of these four companies, Kroger and Walmart are making new highs, while CVS and Target are closely tracking SPY (Figure 4).
Figure 4. Mixed purpose companies
Last is United Health Care (UNH). It is not clear whether the health care providers will suffer or profit from the pandemic. It seems clear that the hospitals will suffer, treating everyone, having the staff under stress and sick, not turning away anyone, and not likely to get paid. Sounds like Universal Health Care except we don’t know if the hospitals and providers will try to collect when this is over. Figure 5 shows that the UNH price dropped with the market, but has recovered. Traders must expect them to come through this whole. Perhaps the government will pay for everything. Stranger things have happened.
Figure 5 United Health Care
What Do the Charts Tell Us?
I believe that buying strength is safer than buying discount. Then Lilly and Johnson & Johnson are the big pharma of choice, Regeneron looks good, and Gilead looks safe. Moderna is too risky for most investors.
Walmart is always a safe buy, and Kroger seems to be doing well but is very volatile. If you trade Kroger, do it with a smaller position.
I am going to guess that United Health Care will always come out making money. I don’t like health care providers because they seem more interested in profits than in serving the public, but that’s what businesses do. We buy their stock because they generate profits.
We are not about to see a roaring bull market or a return to normal for many months, perhaps longer. This will be a market of stock picking. Some companies will do well while others may not survive. It is even difficult to say where the balance is, that is, will the poor performers out weight the good ones? For that reason, I think buying the equity index ETFs will give a disappointing return.
A Standing Note on Short Sales
Note that the “All Signals” reports show short sales in stocks and ETFs, even though short positions are not executed in the portfolios. Our review of using inverse ETFs to hedge stocks during a decline showed that downturns in the stock market are most often short-lived and it is difficult to capture those moves with trend systems. This confirms our approach to the Timing systems, which hedges up to 50% of the long stock risk using multiple trends. In the long run, returns from the hedges are net losses; however, during 2008 the gains were welcomed and reduced losses. In any correction, we prefer paying for risk insurance, even without the expectation of a net gain.
Portfolio Methodology in Brief
All the programs — stocks, ETFs, and futures — use the same basic portfolio technology. They all exploit the persistence of performance, that is, they seek those markets with good long-term and short-term returns, rank them, then choose the best, subject to liquidity, an existing current signal, with limitations on how many can be chosen from each sector. If there are not enough stocks or futures markets that satisfy all the conditions, then the portfolio holds fewer assets. In general, these portfolios are high beta, showing higher returns and higher risk, but have had a history of consistently out-performing the broad market index in all traditional measures.
PERFORMANCE BY GROUP
NOTE that the charts show below represent performance “tracking,” that is, the oldest results are simulated but the newer returns are the systematic daily performance added day by day. Any changes to the strategies do not affect the past performance, unless noted.
Groups DE1 and WE1: Daily and Weekly Trend Program for Stocks, including Sector Rotation, Income Focus, and Dow Arbitrage
The Trend program seeks long-term directional changes in markets and the portfolios choose stocks that have realized profitable performance over many years combined with good short-term returns.
We reentered the market in both the daily and weekly portfolio on Tuesday, April 14, after being in cash for about 6 weeks. As you can see from the charts, we avoided most of the sell-off. Reentering means finding stocks that have a positive return for about the last 60 days. There are a limited number of stocks that qualify, so our 10-stock portfolio has not held more than 5 stocks. As the overall market recovers, our selection with improve. If the broad market declines again we may continue trading a reduced portfolio or exit completely.
Our 2-week returns in April were fractionally profitable, which is good.
Income Focus and Sector Rotation
The income focus program is an example of why daily is often better than weekly trading signals. The daily program was able to get on the right side of preferred stocks (PFF) and gained on an unusually strong move, while the weekly program held the opposite position and took a large loss. The result is clear from the charts, the daily program was up 5.2% for April while the weekly program added to its losses with another 1.7% decline.
Although it has taken a large drop along with the rest of the market, the Sector Rotation program gains 7.9% in April, a reasonable recovery.
An interesting phenomenon is that investors shift to solid companies during a crisis, primarily away from small caps which have both high returns and high risk. In April the Dow Hedge program gains more than 12%, ending up by 0.23% for 2020, far better than the S&P.
Group DE2: Divergence Program for Stocks
The Divergence program looks for patterns where price and momentum diverge, then takes a position in anticipation of the pattern resolving itself in a predictable direction, often the way prices had moved before the period of uncertainty.
The Equity Divergence program also rallied nicely in April, with the 10-stock program higher by 8.2% and the 30 stock up by 4%. Both are only fractionally lower for 2020.
Group DE3: Timing Program for Stocks
The Timing program is a relative-value arbitrage, taking advantage of undervalued stocks relative to its index. Its primary advantage is that it doesn’t depend on market direction for profits, although these portfolios are long-only because they are most often used in retirement accounts.
The new Timing program had gained 33% in both the 10 stock and 20 stock portfolios. That puts both portfolios higher by 27% for 2020. But there is a lot of risk in those moves. This program buys oversold stocks within an uptrend. The April rally was ideal for doing this, with some days gaining 6%. But these moves can also work against you, so any investor looking to trade this program should start slowly.
Groups DF1 and WF1: Daily and Weekly Trend Programs for Futures
Futures allow both high leverage and true diversification. The larger portfolios, such as $1million, are diversified into both commodities and world index and interest rate markets, in addition to foreign exchange. Its performance is not expected to track the U.S. stock market and is a hedge in every sense because it is uncorrelated. As the portfolio becomes more diversified its returns are more stable.
The leverage available in futures markets allows us to manage the risk in the portfolio, something not possible to the same degree with stocks. This portfolio targets 14% volatility. Investors interested in lower leverage can simply scale all positions equally in proportion to their volatility preference. Note that these portfolios do not trade Asian futures, which we believe are more difficult for U.S. investors to execute.
Using the same strategy and portfolio logic, the Weekly Trend Program for Futures has the added smoothing resulting from looking only at Friday prices. While it will show a larger loss when the trend actually turns, most price moves are varying degrees of noise which this method can overlook.
Please read the report describing our revised portfolio allocation methodology. It can be found in the drop-down menu under “Articles.”
Fractional losses in the daily Futures Trend program keeps the small program up nicely in 2020 and the other two portfolios with mixed returns. The weekly program did slightly better in April but still suffers from poor timing. April had fractional gains but the 2020 returns are down from 4% to 10%.
Insert Futures trend charts
Group DF2: Daily Divergence Portfolio for Futures
The Futures Divergence program stood still for another month with two of the portfolios gaining fractionally and one losing fractionally. For 202 the program still posts losses from 7% to 10%.
Blogs and Recent Publications
Trading Systems and Methods, Sixth Edition
The sixth edition of Trading Systems and Methods was released the last week of October by John Wiley. It is completely updated and contains more systems and analyses.
MetaStock issued an upgrade to the Kaufman Fast Strike add-on in late January. This add-on has three short-term trading systems, holding positions for one to three days in two of the programs, and about one week in the third program. They trade noisy markets, including most major index ETFs and futures, plus one program trades the VIX. You can see a description of the programs and a record of past performance on MetaStock. Anyone interested should contact MetaStock at 800-882-3040 or go online to www.metastock.com/kaufmana
The June issue of Technical Analysis of Stocks & Commodities will publish the article “Crashes and Recoveries.” It will help you figure out how the Covid-19 pandemic will play out.
There are some comments in the April issue and on the current stock market drawdown and a correction to Mr. Kaufman’s article in the March issue of Technical Analysis of Stocks & Commodities
“The 1st and 2nd Cross” was published in Technical Analysis of Stocks & Commodities in the March issue. It is based on an idea of Linda Raschke and captures small but reliable pieces of a trending move.
A new article “Essential Math For Traders” will be published in the Bonus 2020 issue of Technical Analysis of Stocks & Commodities.
ProActive Advisor Magazine (on-line) published “Controlling risk that doesn’t go away,” posted on January 15.
Both of these articles are important for understanding your investment risk.
Technical Analysis of Stocks & Commodities published an interview with Mr Kaufman in the December issue.
MetaStock Seminar held in Sunnyvale
Mr. Kaufman was a keynote speaker at the MetaStock conference in Sunnyvale, November 3. You can hear this presentation by going to the MetaStock website.
Technical Analysis of Stocks & Commodities published “Running for Cover,” an article by Mr Kaufman that looks at whether buying bonds after a sudden drop in the S&P can still be profitable.
“A Simple Way to Trade Seasonality” was published in the September issue Technical Analysis of Stocks & Commodities. Seasonal trades and filters can be a big asset to market timing and put you on the right side of a price move.
Mr. Kaufman appears as a chapter in Mario Singh’s new book, Secret Conversations with Trading Tycoons, published by FXI International.
A second part of the interview with Caroline Stepan at TalkingTrading.com was just posted.
Mr. Kaufman was interviewed by Caroline Stephen at TalkingTrading.com. It covered a wide range of topics. It has not yet been posted but should be available soon.
We thought the article in ProActive Advisor Magazine would be in March, but it should appear any day in April. It is “Let’s Be Realistic About Drawdowns.” Most traders don’t pay enough attention to the drawdown history of their trading, or of any system trading. Large drawdowns are infrequent but can be ugly. This article shows how to assess them and some ideas on reducing drawdowns.
Older Items of Interest
For older articles please scan the websites for Technical Analysis of Stocks & Commodities, Modern Trader, Seeking Alpha, ProActive Advisor Magazine, and Forbes. You will also find recorded presentations given by Mr. Kaufman at BetterSystemTrader.com, TalkingTrading.com, FXCM.com, systemtrade.pl, the website for Alex Gerchik, and Michael Covel’s website, TrendFollowing.com.
Mr. Kaufman spoke in Tokyo and Osaka to the Japanese association of Technical and was a keynote speaker at the 2018 IFTA conference in Kuala Lumpur, both last October. You should be able to get a copy of the presentations by MATA, the Malaysian Association of Technical Analysts.
“In Search of the Best Trend” was published in Technical Analysis of Stocks & Commodities in July 2019. An article on “Defense is Your Best Defense” will appear in ProActive Advisor Magazine also appeared in July 2019.
Mr. Kaufman was a keynote speaker at a number of IFTA conferences, the most recent in 2018 in Kuala Lumpur, and Milan in 2017. You can find his presentations on their website.
You will also find many articles posted under Articles on our website, www.kaufmansignals.com. You can address any questions to email@example.com.
© April 2020, KaufmanSignals. All Rights Reserved.