December 2022 Performance Report

Industry Benchmark Performance                                                                                            

The equities and futures funds kept the same pattern in December, losing a modest amount in equities and flat in futures, but higher for the year. No surprises here, but glad to move onto the new year.

Kaufman’sMost Popular Books (available on Amazon)

Trading Systems and Methods, 6th Edition. The complete guide to trading systems, with more than 250 programs and spreadsheets. The most important book for a system developer.

Kaufman Constructs Trading Systems. A step-by-step manual on how to develop, test, and trade an algorithmic system.

Learn To Trade. Written for both serious beginners and practiced traders, this book includes chart formations, trends, indicators, trading rules, risk, and portfolio management. You can find it in color on Amazon.

You can also find these books on our website,

Blogs and Recent Publications

Find other recent publications and seminars at the end of this report. We post new interviews and reference new articles each month, while the Timing program held flat.

A New Weekly Sector Rotation Program

We’ve been following a traditional Sector Rotation strategy for some time and are disappointed with the results. We have created our own version and will start it on January 3. More about it below under the “Sector Rotation” heading.

December Performance in Brief

All systems posted small to modest losses in December, ending a disappointing year for equities, but an exceptionally good one for futures. 2022 proved to be a year to test risk controls. Some investment companies (not to be named) failed to do that, just as advisors in 2000-2002 failed to protect client assets when Nasdaq dropped 85%.

But most professionally managed funds did have risk controls and losses were held to much less than the broad index markets. Even with that, Morningside’s “best performing funds” posted a loss. Most of our portfolios did far better than the Industry. It turns out that passive investing can be more stressful than systematic trading.

Major Equity ETFs

In its final month, the equity market took back its gains from November, finishing on a sour note that marked the trend for all of 2022. Nasdaq went from the strongest market in 2021 to the weakest in 2022. It should be noted that the DOW did best. There is a theory that, during bad times, investors seek the large cap, traditional companies. That seems to be the case with the DOW and S&P doing better than Nasdaq and small caps by quite a bit.

CLOSE-UP: An Optimistic Look at 2023

By all accounts, 2022 was not an easy year. But then trading is never easy. The financial news is filled with stories of large losses and some optimistic forecasts for 2023, many unrealistic. Economists and stock analysts have a poor record of forecasting. As system traders, we will go long the market when it turns up.

Looking Backward (the easy part)

In July we wrote “Is This the Bottom?” The SPY was at 428 and tried to rally – enough to get a small profit before turning down again. It is now at 382, almost 11% lower. It has had a pattern of rallying then declining to new lows.

Chart 1. SPY prices for 2022.

But this last move lower was by only 2%, and the following rally was 14%. All that was a reaction to the Fed saying that it would not raise rates as quickly, but may need to keep raising them longer. It gives the market a chance to absorb the rate hikes. It’s a glimmer of hope that the market is looking for.

This is a continuation of the same story that we saw all year, the market resisting going lower, even in the face of the Fed raising rates and saying that it will continue until inflation is under control – even at the cost of a recession. But employment numbers are strong, wages are up, and the consumers are spending. It is not clear that there will be any significant recession.

For chart analysts there has not been “capitulation,” a sharp sell-off that everyone claims is the end of the bear market. Now that inflation is showing signs of moderating, there is even less reason to bail out (for those who decided to hold on). At some point the market will turn and there is a lot of room for a rally.

The Best and Worst of 2022

What worked in 2022? Not much for stocks, but extremely good trends for futures. Being short equity index, long the U.S. dollar, short bonds (towards higher rates), and trading both sides of crude, all generated big returns. Those markets had clear trends for the long-term trend followers. A case of “Crisis Alpha” that can be added to the decline in 2000 and then in 2008. A rare event but important because it happens and makes trading futures worthwhile.

Our Futures Trend program gained 30% to 50%, while other trend-following CTAs were up over 20%. That goes a long way to offsetting equity losses.

The Best

According to Morningstar, the best funds were Hotchkins & Wiley Midcap (HWMIX) and Invesco’s Small Cap Value (VSCAX). I was surprised when I calculated their returns and found that Hotchkins lost 4.5% and Invesco lost 5.4%. That doesn’t bode well for the other funds.

The Worst

There is a lot of competition for the worst funds of 2022. The winners are Cathy Wood’s ARK Innovation (ARKK), down 67%, and Morgan Stanley’s Intuitional Discovery (MPEGX), off by 63%. Innovation was not rewarded last year.

What Do I Expect in 2023?

It all depends on the Fed. It’s a guess, but with inflation now declining, the Fed could stop raising rates at the end of the first quarter. It doesn’t need to start lowering rates. Prices will have seen their lows. With rates still high, a lasting recovery would start slowly. In my experience, we get a prolonged bull market when money that sits on the side enters very slowly for fear that the rally isn’t real. They keep waiting for a confirmation in the form of a clear bull move or some overt message from the Fed. They miss a large part of the move that follows.

The good thing about a trading system is that it will go long and, if it’s wrong, get out. It will go long again and get out. Finally, it will go long and stay long. We can’t know when the real move will start but by controlling the risk, even capturing small upside gains, we know we will be there for the next bull market.

We expect that, when the Fed is done, rates will have a long, smooth, trend towards lower yields. It always works that way. Rates rise and fall smoothly, sometimes fast, sometimes slower. From 1980 to 2003 rates had an historic decline (Chart 2). It made the careers of many fund managers, including Bill Gross (PIMCO), Winton Capital Management, and I expect even Man Investments. Futures funds often had 50% of their assets invested in the interest rate sector and were rewarded month after month. Returns on interest rates, using a macrotrend strategy, still represents the greatest part of Futures Fund success.

Chart 2. History of Federal Reserve interest rates.

The Effect of a Downward Trend in Rates

Interest rates drive the economy. As rates decline, the U.S. dollar should weaken, equities should rise, the use of energy will rise, and there will be more consumer spending overall. Just as futures markets benefited from trends caused by higher interest rates, they will benefit from slowly declining rates.

While the pattern of rising rates will continue, it should be limited to the first quarter. The second quarter should be stable, with rates held steady. By the fourth quarter of 2023 we should see our rally, combined with an optimistic holiday season, travel, retail, bonuses, and the usual good cheer.


Could it come sooner? It is likely that traders will try to rally the market the first time the Fed doesn’t raise rates. But high rates still constrict the economy and we need to see that inflation is nearing the Fed target level of 3% (but probably 3% because labor costs are now baked in).

It is very unlikely that the Fed will lower rates quickly, as we saw at the beginning of 2020. There is no emergency, and they will worry about causing inflation again. I would expect a slower pattern than any that we see in Chart 2. In those years they were cutting rates to stimulate the economy. Now they are fighting inflation, almost the opposite situation.

Which Sectors? Which Stocks?

Which sectors are likely to outperform as the economy opens up? My favorite is energy. Prices are now low and we would expect travel, shipping, and general movement that requires energy.

I would put retail next. People shopping for items delayed due to inflation.

Technology is anyone’s guess. The sector has been beaten down and buyers should be out looking for new computers, but perhaps not so fast. We can keep our old computers for another year and use that money for more essential items. I bought a new computer a few months ago and found that is was only slightly faster than the old one. No need to rush.

Housing? I have been amazed that prices have stayed high even when buyers should be avoiding paying 6% or more for a mortgage. Especially after years of 3%. But builders will build as rates drop and buyers will buy. I don’t expect it to be a strong rally, but certainly an uptrend.

Low Debt

You can scan the internet for “stocks with no debt” and get a credible list. I did it on December 20th (Chart 3). Intuitive Surgical (ISRG) returned over 50% in 2022. I would think that companies with low debt would have better returns, but not all of those companies have stocks that move. We need movement to make money trading.

Chart 3. Companies with no debt.


For the record, I don’t trade cryptocurrencies and see no economic reason why they would go up or down. Meme stocks were popular for a short time with, Robinhood (HOOD) motivated young traders, but now companies such as AMC are on new lows, as are Coinbase (COIN) and other crypto exchanges. The gilt is off the lily, as we say. It is unlikely that any crypto investor (buy and hold) has a profit. Scandals, such as FTX, lack of regulation, crypto miners going out of business, and other companies declaring bankruptcies does not paint a rosy picture.

Follow Your Rules, Control Your Risk

Again, I remind you that I am a system trader. If you test your strategy over a long period you include many types of price shocks, bull and bear markets, and other patterns. Of course we will have new patterns going forward, but deleveraging when volatility is high and exiting when the trend is against you, are universally accepted as good trading practices. You can add bells and whistles, but the underlying strategy will be sound.

Diversification is important, but not among stocks, which tend to all move together just when you don’t want that. Try to have a fast and slow trading strategy. Add futures. Try to avoid being long everything, or if you are, then deleverage because the risks are higher. Remember that, when volatility is high, the risk does not justify the returns.

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.


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.


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 DowHedge

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 condition and exit the entire portfolio when there is extreme risk or a likely drawdown.

It’s been a year of sideways returns, perhaps a bit better for the Weekly portfolios than the Daily. A disappointing loss in December left the Daily program down by 2% to 6% for the year, while the Weekly program posted a gain of 1% and a loss of 3% for its two portfolios. Still, a win for risk control, putting us in a good position to recover when we finally get a sustainable upward trend in stocks.

Income Focus and Sector Rotation

A year of fighting the trend of rising interest rates left the Income Focus program with losses of 6% and 8% in the Daily and Weekly programs. As we can see in 2008, there is the precedent for losses, although rare. We expect only a few more months of higher rates, then this program should be back on track.

NEW Sector Rotation

After being disappointed with the traditional sector rotation approach, we decided that a few small changes could make this a very attractive strategy. We have limited the sectors to 9 of the Sector SPDRs, which are very liquid. Instead of choosing the sectors with the highest recent returns, we now choose the 3 sectors with the most stable returns. We also exit when the portfolio volatility exceeds 50% and reenter when it drops back down.

The results are clearly better than our previous model, but remember that this is NEW. The results are those of our system testing. Still, it uses the same techniques as our other programs, and we are optimistic that future returns will be similar. It was not overfitted! Feel free to track the results and ask us any questions you might have.

DowHedge Programs

While the December losses did not offset November gains, both program finished off 11% and 125 for the year. Disappointing because the Dow Index did slightly better last year. These two portfolios have outperformed the DOW for nearly 20 years, returning 12% and 18% compared to the DOW’s 7%. We are confident that it will continue to outperform.

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.

Looking for pauses in the trend and trying to capture a continuation of that trend move doesn’t work well when the trend is down and the strategy can only take long positions. The Divergence program lost about as much as the S&P in 2022, not able to get out of the way of the market. December posted losses of 7.5% and 4.5% for a net loss of 18% and 11% respectively.

Group DE3: Timing Program for Stocks

The Timing program is a relative-value arbitrage, taking advantage of undervalued stocks relative to its index. It first finds the index that correlates best with a stock, then waits for an oversold indicator within an upwards trend. It exits when the stock price normalizes relative to the index, or the trend turns down. These portfolios are long-only because the upwards bias in stocks and that they are most often used in retirement accounts.

A bright spot for this year’s equity performance has been the Timing Program. It looks for an upwards trend, a pullback, and a confirmation. Because of those conditions, it has had very  few trades this year, but the 10- and 20-stock portfolios eked out a 10.5% and 7.8% profit. It is hard to argue with any profit this year.

Futures Programs

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.”

Futures had strong year, ending higher by 35% to 55% in the four portfolios, although mixed in December. From the chart below, the smaller portfolios fared the best and only the $1 mil portfolio lagged, if you call up 48% as “lagging.” It seems likely that performance will pause while interest rates turn sideways. We expect another surge of gains as rates fall.

Group DF2: Daily Divergence Portfolio for Futures

The Futures Divergence program uses a similar logic to the Equity Divergence, looking for a pause in the trend direction, then a renewal of that direction. This year was not a good example. The portfolio lost from 2.5% to 4.3% in December, and 12% to 14% for the year. The chart shows that it is stabilizing, so we continue to watch.

Blogs and Recent Publications

Perry’s books are all available on Amazon or through our website,

Coming in January, February, and April 2023

Another year! Technical Analysis of Stocks & Commodities will publish “Matching the Markets to the Strategy,” It is a look at why certain markets do best with specific strategies and why that can materially improve results.

Alejandro de Luis will publish Perry’s article “Living Off Profits,” translated into Spanish, in the January issue of his magazine, Hispatrading. It’s a good way to practice your Spanish!

Perry will give a webinar to Eduardo Lopez’ Robotrader students in Spain on Wednesday, February 8, noon (New York). I’m sure you can log in.

On April 18th, Perry will present to the Society of Technical Analysts (London) on how to develop and test a successful trading system. More about this a time approaches.

October 2022

An interview with Perry was featured in the October anniversary issue of Technical Analysis of Stocks & Commodities. The interviewer is his wife, Barbara Diamond, giving a different perspective on his career.

September 2022

“The Real Risk of System Trading” can be found in the September issue of Technical Analysis of Stocks & Commodities. It summarizes the many way we can measure risk and suggests ways that will help you.

July 2022

The basis for this month’s Close-Up was posted on Seeking Alpha June 16. This month, Perry posted “3 Ways to Reduce Risk and 2 Ways to Increase Profits.”

June 2022

The July issue of Technical Analysis of Stocks & Commodities has Perry’s latest article, “Is It Too Volatile to Trade?” It is important to understand when the risk is greater than the reward.

Perry posted “How To Tell When the Bear Market Has Ended” on Seeking Alpha. You might find it useful if you are thinking about getting back in.

May 2022

Perry’s webinar on risk, given to the U.K. Society of Technical Analysts, can be seen using the following link:

The presentation for MetaStock is available on Youtube using the link:

The May issue of Technical Analysis of Stocks & Commodities has a new article by Perry, “In-Sample Test Data, Out-of-Sample Data – Does It Really Matter?” It is a different look at testing.

March 2022

The 2022 Bonus Issue of Technical Analysis of Stocks & Commodities published Perry’s latest article, “50 Years On. What Have I Learned?” It is a summary of the most important trading and development lessons he has learned.

Sunny Harris ( interviewed Perry on Saturday, March 26. Her approach combines both personal and technical questions, having known Perry for many years. You should find it interesting. Go to

Four articles have been posted on Seeking Alpha in March. They are

  • How To Control the Risk of Cryptos in Your Portfolio
  • How To Find Low-Volatility Stocks That Outperform the Market
  • The Best Balance of Stocks and Bonds Will Surprise You
  • Determining Whether Crisis Alpha Is A Good Idea Or A Flash In The Pan

Book Interview

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,,,, the website for Alex Gerchik, Michael Covel’s website,, and Talking

In May 2021, Mr. Kaufman gave a 30-minute presentation, “Lagged Trends,” for The Money Show on Tuesday, May 11. You can see it using the following link:

November 1, 2020, Mr Kaufman taped a session with Andrew Swanscott’s

“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.

You will also find back copies of our “Close-Up” reports on our website, You can address any questions to

© December 2022, Etna Publishing, LLC. All Rights Reserved.

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