January 2020 Performance Report

Industry Benchmark Performance

Lower returns for the hedge funds was well below the returns for the major equity index ETFs. CTAs did better, generally posting small gains. Volatility has increased in the U.S. with Europe following. It seems likely that some gains were made in the interest rates, but the FX markets have been sideways for the past three months and Brexit has not made much of a different. The USDGBP dropped only 2.2% during January. Most of these programs are based on macrotrends and those trends seem hard to find right now.

Kaufman’s Fast Strike Systems on MetaStock

MetaStock has posted an upgrade to Kaufman’s short-term trading systems, Fast Strike. 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.

January Performance in Brief

Our benchmark 10-Stock Trend program finished higher just shy of 1%, after being up nearly 8% in January. Because it is a high-beta program, it will have larger gains and larger losses, so this pattern is normal. The Timing and Divergence programs both finished with losses of less than 1% to about 3%. The Weekly 10-Stock program did the best, finishing higher by 4.4% for January.

Futures did poorly, posting losses in all daily and weekly portfolios. A sharp turn in price direction is always bad for a leveraged trend system, but they tend to recover just as quickly. While the Futures Trend programs loss between 1% and 3%, the Divergence program which is far less diversified, lost up to 9.5%.

Major Equity ETFs

The SPY was higher by 3.1% on January 17th, and NASDAQ by 5.6%, before the corona virus scale took hold. The markets anticipate a drop in global trade and a likely reduction in GDP. Of course, that could change at any time. But SPY still closed slightly higher for January, up 2%, and NASDAQ higher by 3%. The worst was IWM, the small caps, which tend to be out of favor when there are concerns about the economy.

Although the news tends to make everything a crisis, the decline this past month is still minor compared to other price declines during 2019, which doesn’t show the 20% drop in December of 2018. Reports of illness in China are growing additively, not exponentially, that is about 1500-2000 per day. We’ll watch to see whether that grows or stabilizes.

Trend Strength Index

One measure of market strength is our Trend Strength Index. Our Trend strategy is a composite of many trends, medium term to slow applied to about 375 stocks. When combined, these determine the position size of the current trade. If the faster trends are down but the slower one up, then the position size might be zero. The appearance is that trend positions scale in and out based on the strength of the trend. The Trend Strength Index appears at the bottom of the Trend Stocks All Signals report each day. We’ve tracked it from the beginning of 2014, and the chart below compares it with the SPY. TSI is the Trend Strength Index and SPY is the SPDR ETF. TSI values about zero indicate a positive trend. The range of the TSI is +1 to -1.

The Trend Strength Index reflects the internal strength (momentum) of all the stocks that we track, about 275. These stocks tend to have a stronger trend than the typical stock. It is also a mix of stocks from the S&P and Nasdaq, with a few smaller caps, but none trading fewer than an average of 1 million shares per day.

As expected, the Trend Strength Index has tracked the SPY higher but stopped just short of the previous overbought level in January 2018. The first support level would be about 20, still in a slight upward trend, with the next level just about zero, sideways. There is no indication yet that the market is ready to sell off in any serious manner.

We offer this Index for those investors who select their own trades rather than following our sample portfolios. Daily Index values are available to subscribers.

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.


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.

Gains in all Equity Trend portfolios keeps this profitable run alive. The Weekly programs did better than the Daily because they held Tesla all week into the earnings report while the Daily program got out then back in. Tesla has tripled in price in the past two months and we have, fortunately, benefited from that. However, we expect some high-performance volatility as the tech stocks react to the Chinese quarantines.

Income Focus and Sector Rotation

Both Daily and Weekly Income Focus portfolios finished January just shy of 1% higher, keeping them on track for good returns. This program keeps performing up to expectations with good returns and low risk.

Sector Rotation

After a run of 10% profits in two months, January posted 7% loss. Still, this program sits near its highs, even with somewhat bumpy performance.

DOW Arbitrage

A gain of more than 1% in January posted new highs for this program. It offers good returns and risk protection when markets get too volatile.

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.

After the outstanding returns of 2019, the fractional losses posted in January look unimportant. While the larger 30-stock portfolio has lower volatility, the higher returns of the 10-stock portfolio are very attractive.

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. When the broad market index turns down this program hedges part of the portfolio risk. The ETF Rotation program buys undervalued sectors, expecting them to outperform the other sectors over the short-term.

The Timing Program buys undervalued stocks so that it will buy the weakest even in a declining market until that stock shows that it is not expected to rally. Risk is protected with an absolute stop of 15% and also by hedging the broad index.

Losses of 2% to 3% keeps this program stuck in a sideways pattern. IWM, the small cap ETF, is the only index now showing a short-term downtrend, so this program will be partially hedged if stocks continue to slide. So far, most of the downturns have proved false, which means that the program enters a hedge position, then removes it. A difficult scenario for profits.

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 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.”

Modest losses of from 1% to 3% in both the Daily and Weekly Futures Trend portfolios keep equity near their highs. While the daily program looks much more consistent, they both have similar long-term returns.

Group DF2: Daily Divergence Portfolio for Futures

As much as we were hoping that this program would continue to go higher, it took a healthy loss of 7% to 9% in January. This keeps its volatile historic pattern. It could take another smaller loss before reversing, and still keep within its pattern.

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 Strategies

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

January 2020

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.

December 2019

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.

November 2019

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.

September 2019

“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.

Book Interview

Mr. Kaufman appears as a chapter in Mario Singh’s new book, Secret Conversations with Trading Tycoons, published by FXI International.

May 2019

A second part of the interview with Caroline Stepan at TalkingTrading.com was just posted.

March-April 2019

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.

January 2019

Technical Analysis of Stocks & Commodities will publish “Volatility: What They Don’t Teach You In Grad School,” in the January edition.

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 perry@kaufmansignals.com.

© January 2020, KaufmanSignals. All Rights Reserved.

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