Industry Benchmark Performance
This is shaping up to be an outstanding year for equities, and a good one for futures. The Equity Long funds are actually ahead of the S&P through April, a rare occurrence. All performance benchmarks are positive, a good sign for investors.
New Presentation on April 11
Mr. Kaufman will be giving a new presentation on a short-term trading system for The Money Show. It will be on Tuesday, April 11, at 2:50 (New York Time). If you would like to join, use the following link:
Blogs and Recent Publications
Don’t forget our new book, “Kaufman Constructs Trading System.” You can find it on Amazon or on our website, www.kaufmansignals.com.
Find recent publications and seminars at the end of this report. We post new interviews and reference new articles each month.
April Performance in Brief
Very different results from the 10-stock and 30-stock Equity Trend portfolios. While the 10-Stock is recovering from a drawdown, the 30-stock posted a run of profits. Diversification helps. The Weekly Equity Trend portfolios are holding on to their gains for the year.
Our other portfolios are all doing well, with the Timing program and the Futures Trend outperforming the others. The Sector Rotation program continues its successful run.
Major Equity ETFs
All the equity index markets are putting in an outstanding performance for the year, even though Nasdaq (QQQ) and the small caps (IWM) show more volatile returns for the past two months. Talk of inflation and higher taxes have not overwhelmed what analysts are calling a recovery market. They expect GDP above 6%.
CLOSE-UP: All About Cryptos
Caveat Emptor: The following is my own summary of the state of cryptocurrencies. It is not intended to be either technical or complete, and is compiled from sources believed to be credible. In doing so, there may be an unintentional bias, although I have tried to be impartial about the value and use of these products. This is not a recommendation to buy or sell and is intended only to educate… PJK
A cryptocurrency (or “crypto”) is a digital “currency” that may be used to buy goods and services from a limited number of companies, the most well-known being Tesla. There are 6,700 known cryptos being marketed. Most are unregulated and used for speculation. Ethereum (ETH) is traded on the NYSE and is said to have value as a peer-to-peer facilitator. Bitcoin’s claim to fame is a tracking technique called blockchain. We will use the term “Bitcoin,” but we could mean any cryptocurrency.
Why a Cryptocurrency?
The theory behind cryptocurrencies is to provide investors with their own “currency” that can be used for purchases. The providers argue that sovereign currencies (such as the U.S. dollar, euro, and yen) are manipulated. A cryptocurrency is valued only by its supply and demand.
Companies issue their own cryptos called “tokens.” They are similar to buying chips at a casino. You give cash for the tokens and redeem them for cash. Because BTC-USD is priced at about $55,000, you can buy a small fraction of a Bitcoin.
Cryptocurrencies use an accounting technology called blockchain. It is said to track and keep every transaction and provide unprecedented security. The blockchain process has been adopted by other companies.
Mining is the blockchain auditing process and is paid in Bitcoins. The payment (in Bitcoins) is an incentive that motivates someone to assist in the purpose of mining: to legitimize and monitor Bitcoin transactions, ensuring their validity. Because anyone can participate, it acts in the same way as a “wiki,” where everyone participates to provide knowledge (most of it accurate).
Miners are independent investor/auditors. They verify, for example, that the same Bitcoin was not used twice for a purchase. It appears that you can copy a Bitcoin token and use the copy to purchase. Auditing is a complex process, requiring computer skills. You can find out more on the internet under “Bitcoin mining.”
We have no idea what happens when a miner finds a problem, or how it is corrected. We could find nothing saying that all transactions are verified.
To earn Bitcoins from mining, you not only need to audit 1 megabyte of transactions, but you need to provide proof of accuracy and be the first to audit that block of trades. Good luck!
The total value of the 6,700 cryptocurrencies on April 13, 2021, was more than $2.2 trillion. However, the process is unregulated, which means there is counterparty risk. You are never sure if you can redeem your investment or if you will get the price you expect.
The 3 largest trading cryptocurrencies by market capitalization are Bitcoin ($1.2 trillion), Ethereum ($263 billion), and Binance ($87 billion).
Dogecoin started in 2013 as a spoof on Bitcoin, but with no cap to the supply of coins. That allows it to inflate indefinitely. Its technology uses blockchain with 1 minute block intervals, making it faster than Bitcoin. Traders have pushed it into the mainstream of cryptos.
Why Would I Buy a Crypto?
Generally, you buy a cryptocurrency because you think its price will go up. Some investors also buy because
- They can use it to purchase a product
- They do not like the Central Bank determining the price of currency
- They like the blockchain technology
- It is volatile and good for fast trading
Valuing a Cryptocurrency
The value of a cryptocurrency is the current price. It has no intrinsic value. Investors argue that neither does gold. But a true currency is based on the goods and services provided by a sovereign nation. When someone buys grain from the U.S., they exchange their currency of U.S. dollars. That is buying the dollar.
Many traders see cryptos, such as Bitcoin, simply as speculation. Others see business value in a listed company such as Ethereum. To profit from a crypto trade, someone needs to buy your position at a higher price. That has been called “the greater fool theory.” At this time, there appears to be a lot of them.
Central banks try to maintain stability in their currency value. They will accept a slow change but resist anything fast. Sometimes they are forced, as did Mexico, to devalue their currency, or like Japan, to support its value. But these are rare cases.
In Figure 1, the EURUSD cash prices (top left) show that it is rare to see a move more than 2%. Most moves are closer to 1%. On the top right is Bitcoin showing frequent moves over 10% and some over 20% in a single day. Ethereum (ETH, lower left) has a different pattern but similar volatility to Bitcoin. Dogecoin (lower right) is the most volatility, with a 1-day jump of 250% but also large downward plunges that are difficult to see because of the scale.
This extreme volatility means that, if you are putting cryptos into your portfolio, it should be about 1/10 of your other position exposure. I have always believed that equal weighting gives the best diversification.
Figure 1. (Top) Euro cash volatility, (Second) Bitcoin cash volatility, (Third) Ethereum volatility, and (bottom) Dogecoin volatility.
Buying a Cryptocurrency
Bitcoins (BTC-USD) are traded 7 days a week. Cryptos listed on an exchange, such as Ethereum (ETH) and BTC CME futures, trade during exchange hours. For those markets, you buy and sell just like any other stock or futures market, using funds deposited with your broker. You can also buy certain cryptos using Paypal.
For off-exchange cryptocurrencies, you will need a “wallet,” an online app that can hold your currency. Coinbase (COIN), an exchange that has recently gone public, allows you to create both a wallet and buy and sell cryptos. You can also use Tradestation and Robinhood, among others.
- Need an online wallet for cryptocurrencies
- You can buy 1/100th of a bitcoin ($55,000/100 = $550)
- Use a “stock exchange” such as CEX (UK), Bitfinex (by bank transfer), EXMO (transfers and passport), Yobit
- “Online Exchanger” (>100 choices): Changelly provides bid-asked, Coinmama allows debit/credit card purchases using a wallet.
Read the rules carefully. A mistake can be costly.
The nature of blockchain, and its encryption, is said to make cryptocurrency transactions secure. Purchases cannot be traced. However, this is not the same security that a bank offers. The FDIC guarantees protection against fraud for bank accounts up to $250,000. There is no such protection for cryptocurrencies in the event something goes wrong.
Don’t Be Fooled by the Word “EXCHANGE”
The New York Stock Exchange and the Chicago Mercantile Exchange are real “exchanges.” They have a clearing house and guarantee that trades are recorded properly and will be paid correctly.
A cryptocurrency “exchange” is simple a business that will buy and sell cryptocurrencies for you. They do not guarantee anything, there is no assurance of security, and no assurance that they will be in business tomorrow. While some of these exchanges, such as COIN, are now well financed, trades that you make on the NYSE to buy and sell shares of COIN are guaranteed, but not any business you do with COIN directly.
Banned in Some Countries
Crypto trading is legal in the United States, but not in China and recently not in Turkey. Remember that they are unregulated if not traded on a major exchange. Check out the company, read the fine print. Buyer beware!
Buying a Tesla with Bitcoin
We do not know the terms needed to purchase any product using a crypto. I am going to guess that the company is concerned with the volatility of the crypto; therefore, it may discount the value of the Bitcoins, just like a money exchange booth at the airport will have a 10% spread (or more) between the buy-sell price when you convert your U.S. dollars to euros. They cannot afford to take the risk of unexpected volatility that will turn a profit into a loss.
The following is from the Tesla website:
The Bitcoin network protocols are open source, and anyone can use, copy, modify, and share them. We do not own or control the Bitcoin network or the software for your Bitcoin wallet. The Bitcoin network protocols and their operating rules can change at any time (like in the event of a fork), and those changes can affect the value, function, or even the name of Bitcoin. If there is a problem with the Bitcoin network, you can lose your Bitcoin (and we’re not responsible if that happens).
With a huge number of cryptocurrencies available, is there an arbitrage? That is, if one is going down and the other is going up, can I sell the strong and buy the weaker, expecting them to correct?
We arbitrage stocks in the same business, such as microchips and even retail. But there are fundamentals common to both, mainly consumer demand and discretionary spending. If ACER had a good quarter selling computers, we can expect Hewlett-Packard to do the same.
Not so with cryptos. Each offering is entirely dependent on their buyers and sellers, and the credibility of the underlying issuer. There is no clear relationship and no arbitrage.
Drug cartels are always looking for a way to change their cash into a mainstream investment. That is why banks no longer allow large deposits of cash. In the U.S. it is governed by the Patriot Act.
No doubt, there are countries that will allow an “investor” to deposit large sums of cash, buy cryptos, and either purchase goods or redeem their deposit at a later date for new cash. It is called “laundering” the money and it is illegal in most countries.
The security of crypto transactions makes it impossible to identify the trader. This becomes a desirable vehicle for money laundering. Cryptos and their issuers are under scrutiny from governments to prevent this from happening. It will lead to regulation and may put pressure on crypto prices.
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 equity portfolios. Our work over the years shows that downturns in the stock market are most often short-lived and it is difficult to capture with a longer-term trend. The upwards bias also works against shorter-term systems unless using futures, which allows leverage. Our decision has been to take only long positions in equities and control the risk by exiting many of the portfolios when there is extreme volatility and/or an indication of a severe downturn.
Portfolio Methodology in Brief
Both equity and futures programs 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 on the specific system, 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 outperforming 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 since are simulated but the returns from 2013 are the systematic daily performance added day by day. Any changes to the strategies do not affect the past performance, unless noted. The system assumes 100% investment and stocks are executed on the open, futures on the close of the trading day following the signals. From time to time we make logic changes to the strategies and show how the new model performs.
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. It will hold fewer stocks when they do not meet our conditions, and exit the entire portfolio when there is extreme risk or a likely drawdown.
Both Daily and Weekly Trend portfolios show the recent drawdown. These are limited to the 10-stock portfolios which now seem to be recovering. Our report last month indicated that these drawdowns, while unpleasant to both you and me, are part of the process of trying to outperform the market. Last year’s gains were exceptional, so that we can weather this drawdown.
Income Focus and Sector Rotation
Another small gain for both the Daily and Weekly Income Focus. This is excellent give that interest rates continue to rise. The Daily program continues to be more flexible and has held onto its long-term uptrend.
There is no stopping the Sector Rotation program this year. It gained nearly 5% in April and is ahead by 25% this year. Although it recently exited XLE, the energy ETF, we expect that’s where most of the profits came from. It is now long Home Builders, Financials, and Metals.
Gains of 1% to 3% in the Dow Hedge programs, mostly in-line with the Dow Index performance this year, which is also good. Of the four major equity index markets, the Dow is lagging, even while it is higher by 10% this year.
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.
Given the exceptional diversification that this program offers, its gains of about 3% in April puts it back near its highs. The 10-stock portfolio is up by more than 5% and the 30-stock more than 7%, a respectable performance.
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 does not depend on market direction for profits, although these portfolios are long-only because the upwards bias in stocks and that they are most often used in retirement accounts.
Equity Timing is another program that won’t give up, gaining 1% to 2% in April, putting it higher by 29% and 16% for the smaller and larger portfolios. This program essentially buys undervalued stocks relative to one of the major equity index markets. This is clearly a strategy whose time has come.
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 down 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.
Please read the report describing our revised portfolio allocation methodology. It can be found in the drop-down menu under “Articles.”
The Daily Futures Trend program posted another month of gains between 1% and 3%, bring the year-to-day to 13% to 22%, which the smallest portfolio gaining the most.
We wanted to see where the profits have been coming from, so we looked at sector returns from this year and 2020, show in the table below the equity returns. We were surprised to see that all sectors show a healthy gain, while we expected energy to be the leader. We were just curious.
Group DF2: Daily Divergence Portfolio for Futures
Small gains in April keeps this unusually volatile chart pattern for the Futures Divergence program. It is now ahead by 5% to 6% for the year.
Blogs and Recent Publications
Kaufman Constructs Trading Systems
You will find both an ebook and a print version of Perry’s new book, Kaufman Constructs Trading Systems, published on Amazon. It is a complement to Trading Systems and Methods. It takes you step-by-step through the process of developing a trading system, with many examples. Order it through our website, www.kaufmansignals.com or directly on Amazon.
Trading Systems and Methods, Sixth Edition
The sixth edition of Trading Systems and Methods was released at the end of 2019 by John Wiley. It is completely updated and contains more systems and analyses.
Mr. Kaufman will give a 30-minute presentation for The Money Show on Tuesday, May 11 at 2:50 pm New York time. He will present a new short-term trading system that should interest most traders. You can sign up using the link:
There are new articles being published in Technical Analysis of Stock & Commodities. The next one is “Better Entries,” scheduled to appear in the May issue. Keep checking!
Mr. Kaufman will present to the technical students at the Universidad Politecnica de Madrid on February 3, 11 am CST. He will discuss risk and offer advice that comes from years of trading.
Technical Analysis of Stocks & Commodities published an article on Short-Term Patterns, with lots of computer code so that you could do it yourself.
November 1, he taped a session with Andrew Swanscott’s BetterSystemTrader.com
November 18, he presented a webinar on trading to the Italian bank, Fineco, this time in English.
November 27, he presented another webinar to Fineco subscribers in Italian.
Mr. Kaufman had a full schedule in October and November. You can find videos and recording of the following sessions:
On October 3 he addressed 1,000 members at the Indian Technical Analysis group You can find more at https://www.algoconvention.com/schedule
On October 10 he recorded a session on volatility and risk for TopTradersUnplugged.com
On October 22 he addressed another large group for the Italian bank Fineco (in Italian).
“Fools Rush In,” an analysis of the best time to buy an IPO, will be published in the September issue of Technical Analysis of Stocks & Commodities. There is also a full description of Kaufman Constructs Trading Systems in the “Books for Traders” section.
Mr. Kaufman gave a presentation at Jake Bernstein’s “Cycle” seminar. Anyone interested in a copy of the presentation should send a request to firstname.lastname@example.org.
The June issue of Technical Analysis of Stocks & Commodities published the article “Crashes and Recoveries.” It will help you figure out how the Covid-19 pandemic will play out. It will also have the TradeStation code for the “2nd Cross” strategy, requested by readers.
Mr. Kaufman appears as a chapter in Mario Singh’s book, Secret Conversations with Trading Tycoons, published by FXI International.
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, Michael Covel’s website, TrendFollowing.com, and Talking Trading.com.
“The 1st and 2nd Cross” has been very popular with readers. It was published in Technical Analysis of Stocks & Commodities in the March 2020 issue. It is based on an idea of Linda Raschke and captures small but reliable pieces of a trending move. You can find it online.
© April 2021, Etna Publishing, LLC. All Rights Reserved.