Kaufman Signals

July 2018 Performance Report

Industry Benchmark Performance

Equity funds added a little to their gains for the year, with Equity Long funds up 2%. CTAs continue to struggle. All categories of CTAs are posting small losses for July and all are down for 2018.

Blogs and Recent Publications

Find this at the end of this report. We post new interviews and reference new articles each month.

July Performance in Brief

After being up significantly in equities, thanks to the tech stocks, we finished the Trend portfolios down for July – thanks to the tech stocks. Still, the 10-stock Trend portfolio is up 16% this year. We’ll look at their sharp sell-off in our Close-Up for the month.

Both the Timing and Divergence programs did much better in July. The smaller Divergence program is up 8% and the Timing program has almost recovered its losses.

The futures programs were mostly profitable, with the Weekly Trend program still performing well ahead of the industry this year. The Daily Trend program, which usually shows better returns than the Weekly, had mixed returns in July.

Major Equity ETFs. Looking at the major index markets since the presidential election, all are substantially higher. January 2018 saw the biggest gains but then began a few months of high volatility. Since then NASDAQ has outperformed, driven by the tech stocks, while the S&P, the broadest indicator, has not made a new high. The S&P has been climbing slowly but faces strong resistance slightly higher.

CLOSE-UP: The Tech Stocks – Boom or Bust?

But first a look at last month’s comments: The Pharmacy Caper

There was a nasty drop in the prescription drug delivery companies when Amazon bought PillPack on June 28. We looked at the history of the grocery take-over and found that the competition was all trading higher than they were at the time Amazon bought Whole Foods. At the same time, Amazon was continuing to move higher, no doubt driven by other factors than Whole Foods.

What has happened to Amazon’s competitors in the drug delivery business? Figure 1 shows that all but CVS have fully recovered, and Amazon has dipped to be only marginally higher. Rite-Aid, the stock hit the hardest has recovered the most. Wal-Mart took only a small dip, then continued its steady upward climb. Wal-Mart is easy to explain because prescription delivery is a small part of Wal-Mart’s total business.  We’ll consider this event over and wait for Amazon’s next announcement.

Figure 1. Pharmacy stocks

The Tech Stocks

The chart of the major index ETFs shown earlier makes the bull market that followed the 2016 election very clear. NASDAQ was a big part of that and is now the only index making new highs following the February sell-off. Those highs have been driven by the tech stocks shown in Figure 2.

Figure 2. Tech stocks for the past 2 months.

The beginning of June shows gains in TWTR, NFLX, and BIDU, but then the entire group stalls out. BIDU, BABA, and YAHOO (AABA), an owner of BABA, post significant losses. But it wasn’t until earnings were announced last week that Facebook and Twitter tumbled 20%. Then Twitter lost another 7%. That still leaves TWTR up 32% for the year, but FB is off 2% for 2018.

We commend Facebook for the effort it is now making to identify false accounts, and in their work with the FBI to uncover social media infiltration by Russia. But that comes at a cost, both monetary and socially. Some users feel that Facebook should have acted sooner, and those users now are less frequent users. Make no mistake, uncovering these problems is difficult and expensive, but the pressure to get it right is enormous. At some point, Facebook will be the safest and cleanest source of information, but not yet. Twitter will have similar problems, but not of the same magnitude unless they allow even longer messages.

Now that Facebook has been severely “punished” by the market, we expect a steady recovery. If for no other reason than it’s convenient, there are few viable alternatives, and most people don’t like to change.

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 275 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.

The small chance of the bull market resuming turns out to be what has happened, even though SPY has not made new highs. For most oscillators, a bull market will keep values fluctuating only in the range above zero – as we’ve seen since 2016. Still, the Trend Strength Index is below 30, not a ringing endorsement of a bull market. This pattern still evokes caution.

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.

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.

A volatile month with tech stocks gaining more than 7% in the 10-stock portfolio, then losing it all in the last week mostly due to Twitter. The 10-stock portfolio is still doing the best, up 16% after the tech reversal. Small losses in other daily portfolios. The Weekly Trend program gained slightly in all portfolios but is now up only 2% for the year, also a casualty of the tech stock volatility.

Income Focus and Sector Rotation

Interest rates are still being pushed higher by the Fed, even if the market is resisting. Both Daily and Weekly programs gained about 0.20% in July. The Daily Program remains down 1% and the  Weekly up about 0.90%, about the same as the Industry.

A gain of 1% in the Weekly Sector Rotation program still leaves it down 7% for the year, a disappointing performance for a “classic” strategy. Still, these programs are capable of recovering at any time.

 DOW Arbitrage

July was better for this program, up over 3%, and now over 4% for the year. That puts it back on track for good 2018 returns.

 

 

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.

Gains of over 3% for each of the Divergence portfolios, putting the 10-stock portfolio up 8% for the year, while the larger portfolio still shows a fractional loss.

 

Group DE3: Timing Program for Stocks and ETF Rotation

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.

While both portfolios gained in July, the larger one was up over 3% while the smaller one was up less than 1%. Usually, the smaller stock portfolios has higher returns and higher risk. Both programs are down less than 1% in 2018.

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.”

The Weekly Futures program continues to outperform the daily program, but only the 250K programs posted losses in July. The Weekly program is well ahead of the industry, with returns from 6% to 13% while the CTAs are down about 5% for 2018. Still, there is a lot of volatility this year.

 

Group DF2: Daily Divergence Portfolio for Futures

Gains for 5% for all portfolios is difficult to see on the chart below, but puts this program well on the road to recovery, now down about 5% for the year.

Blogs and Recent Publications

Trading Program

KaufmanSignals has a short-term futures trading program being traded at Striker Securities, a Chicago Futures Broker. As of May 2018, having started 10 months ago, it is ahead by 35% on a $20,000 account before subscription fees. For more information contract Striker at (800) 669-8838 or go to:

https://striker.com/En0302_trading_systems_list.php?webpageID=7&webmainID=3&detail=on&sysID=1663

July

“In Search of the Best Trend” will appear in Technical Analysis of Stocks & Commodities this month.

A new article on “Defense is Your Best Defense” will appear in ProActive Investor Magazine this week.

March

Mr Kaufman spoke to the Austin chapter of the CMT Association (previously the MTA)

He was interviewed by Jacek Lempart for his blog systemtrade.pl, serving the European Polish investors. The interview will be posted soon.

February

A new interview with Mr Kaufman has been posted on the FXCM website (Forex Capital Markets) as of a few days ago.

Mr. Kaufman spoke at the Trader’s Expo in New York on Monday, February 26th. His presentation was on ways to reduce risk that traders forget to use.

January

Mr. Kaufman has a presentation in Jack Schwager’s FundSeeder webinar, which should now be available online.

There is an interview on YouTube conducted by Alex Gerchik for his Russian audience. We think you will find it enjoyable and helpful. The link is:

https://www.youtube.com/watch?v=TznkQtPQXgM&t=3s

Technical Analysis of Stocks & Commodities published Part 1 of a two-part article on profit-taking and resets, in their January issue.  The first part looks at trend following and the second at short-term trading. Part 2 is scheduled for the February issue. Before that, they published “Optimization – Doing It Right,” in the September issue.

Mr. Kaufman was a Keynote Speaker at the IFTA annual conference, hosted by the Swiss technical analyst’s association (SIAT) held in Milan, Italy, in October 12-16, 2017. A video of the presentation has been posted on the IFTA website.

“Portfolio Risk in Uncertain Times” was just posted on Seeking Alpha. It shows a better way to structure your portfolio. Prior to this, you will find “Living Off Profits,” which shows how much you can safely withdraw from your account without seeing spiral down out of control. Before that Seeking Alpha published “What Are the Odds?” a look at how to assess the risk of loss for any investment.

Modern Trader published “Dogging the Dow in the current edition, and a new article “Trading Opening Gaps” in stocks, scheduled for January 2018.

The IFTA Journal published an interview with Mr Kaufman in the most recent quarterly issue.

The broker FXCM will post a live interview with Mr Kaufman, taped on October 30.

ProActive Investor Magazine published Keeping Risk Under Control on June 22. Check their website. It will be publishing other articles later this year.

Andrew Swanscott at BetterSystemTrader.com (a good source for trading systems) has put up an edited version of an older presentation of Mr. Kaufman’s. It’s all about price noise and the Efficiency Ratio.

Look for past articles by Mr. Kaufman on Seeking Alpha (www.seekingalpha.com), Forbes (https://www.forbes.com/sites/perrykaufman). www.equities.com, Modern Trader, Technical Analysis of Stocks & Commodities, and Proactive Advisor Magazine. You will also find many articles posted under Articles on our website, www.kaufmansignals.com. You can address any questions to perry@kaufmansignals.com.

 

© July 2018, Kaufman Signals. All Rights Reserved.

© copyright 2018 www.KaufmanSignals.com Terms & Conditions Disclaimer Privacy StatementSite CreditsLogin