Industry Benchmark Performance
A strong rally cuts the year-to-date losses for all equity funds, putting them well ahead of the index markets. At the same time, futures posted small losses, trimming their year-to-date gains. These market seem to be going in opposite directions, which would be good for diversification.
Kaufman’s New Book, “Learn To Trade: Trade To Win with a Rule-Based Method”
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 as a print or ebook on Amazon using the link at the end of this report.
Don’t forget, “Kaufman Constructs Trading System.” You can also find it on Amazon or on our website, www.kaufmansignals.com.
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.
July Performance in Brief
Small gains in most of our portfolios in July, but all programs are well ahead of the major index markets. The Equity Trend program reenter the market on July 5th after an extreme volatility exit. Even now, it does not have all 10 positions filled because few stocks have recovered enough to show strong upward trends.
Timing program remains out of the market, now nearing three months. While more than 25% of the stocks are showing upward trends, this program needs a pullback without the trend turning down. It could happen at any time.
The Futures Trend program is still the best performer this year, higher by 17% to 28%. Due to popular request, we have added a new portfolio that only trades U.S. futures.
Major Equity ETFs
After seven months we finally see an upturn in the broad market, with Nasdaq leading. Our Close-Up report this month (below) looks at whether this can be the bottom of the bear market. The news projects both options, a bottom and a bear-market bounce. You will need to decide for yourself, but there a always stocks that will prove to be good buys.
CLOSE-UP: Is This the Bottom?
On June 16, I posted an article on Seeking Alpha, “How To Tell When the Bear Market is Over.” The key points were:
- The trend turns up
- Volume increases with the new upward direction
- Prices move up when the economic report is clearly negative
At the time of the report, none of these triggers had occurred. Since then, we have some positive indicators.
On August 1, I posted another article on Seeking Alpha, “The First Chance to Buy the Bottom.” The following is a summary, but you can go to Seeking Alpha for the full post.
The market response if very sensitive to wording and inuendo from the Fed. Even though Powell has said the he will “stay the course,” investors see the Fed pulling back on increased interest rates, even starting to lower them next year.
We have very different demographics from when rates peaked at 18% in 1980. At that time, debt was low and boomers were entering the workforce. Now boomers are retiring and cutting spending. Women are no longer a driving force. Debt to GDP is now 130% instead of 30%. The economy is more fragile.
How Did the Market React?
What did the market react to the Powell press conference? Charts 1, 2, and 3 show the 5-minute price moves of SPY (S&P), QQQ (Nasdaq), and TLT (the long bond ETF). The equity index markets jumped on the announcement, or at least the commentary on the announcement. TLT dropped even though the Fed is planning at least two more rate increases. I normally expect “buyer’s remorse” but it did not happen. Equity prices continued higher.
Chart 1. SPY 5-min chart Wednesday through Friday
Chart 2. QQQ 5-min chart Wednesday through Friday
Chart 3. TLT 5-min chart Wednesday through Friday.
These market moves seem a bit optimistic. Rates will still go higher, unemployment should increase, and inflation will be slow to reverse. But if you are a technical trader, you need to follow the rules. This was a negative report with a positive reaction. It satisfies the 3rd and most important rule.
The 20-day moving average turn up on July 13 in all three ETFs. In fact, the stock market has been moving higher for more than a month – and is now accelerating. You can see where it started in Chart 4.
Chart 4. Prices turn higher in June, interest rates turn lower (an upwards move in TLT).
What about volume? Ideally, we want to see volume rise to confirm the new uptrend, but this may be too early to tell. However, it is not declining, a sure indiction of a failing rally.
Chart 5. Volume of SPY, QQQ, and TLT from July 2022.
We can also look at the underlying cause of inflation – food and energy. Chart 6 shows cash gasoline and natural gas prices from 2022. Gasoline has pulled back about 22% from its highs (even more in the past two days), while natural gas has not yet made new highs.
Chart 6. Natural gas and unleaded gasoline prices from January 2022.
Wheat and corn exports have been hampered by the Russian war, yet prices have declined significantly. I find that confusing, but that doesn’t change the fact that prices are lower. (see Figure 7).
Figure 7. Wheat and corn cash prices from January 2022.
I am an algorithmic trader because I can’t explain what is happening. We expect higher interest rates, job loss, sustained inflation, but the market rallies. Investors have decided that this is the bottom, or likely to be the bottom. Yes, prices seem to be normalizing and the Fed may raise rates slower. It is enough to rally the market.
How to Trade as Safely as Possible
If you are a trader that wants to be in the rally as early as possible, this is the first opportunity. But controlling your risk is most important. Use the 20-day moving average or the previous market lows as your exit.
This may be the bottom of the market. We won’t know for a long time. But it is likely that there will be another sell-off. Interest rates will go higher. We have no idea how the market will react. It has a mind of its own. Best be safe and know where you will exit. You can always reenter. Take small losses and wait for the big move.
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 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.
Small gains in all Daily and Weekly Trend portfolios puts the 10-Stock Daily program back into the profit column for the year. The other Trend portfolios are still showing small losses, but all are well ahead of the major equity index markets.
This program was out of the market due to extreme risk and reentered on July 5th. It is still underexposed, looking for stocks that have a strong enough trend to resist another sell-off. The major holding are in pharma, with only one energy position, OXY.
Income Focus and Sector Rotation
The Daily Income Focus program is holding up nicely, even though it needs to fight with higher interest rates. This month both the daily and weekly portfolios gained 3.5% to 4%, a very big move for this low volatility program. The Weekly program suffered from not being able to change positions quickly enough. Both programs are still lower for the year, but if the market sees slower rate hikes coming, we could see a recovery soon.
A recovery of more than 3% trims this year’s loss to about 8%. So far, the equity market keeps rotating from one sector to another, but may settle on semis and tech, given the strong rally in Nasdaq.
Both the Weekly and Daily DowHedge were out of the market in July due to extreme volatility. The Daily program reentered about 10 days sooner than the weekly program and netted a small gain for the month. The weekly program posted a small loss. Both are still lower by about 11% for the year, better than most of the index markets but about the same as the Dow ETF QQQ. It still prevented the larger losses seen in most markets.
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 4.5% and 3.0% in the 10- and 30- stock portfolios recovers some of the losses for the year. This program looks for a pause in an uptrend to capture short-term profits. In a bear market those pauses did not follow-through to an uptrend. Even with those losses, this program did better than the broad market.
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.
This program must know something that we don’t. It’s been out of the market since April 25 but now seems about 25% of the stocks that it follows in an uptrend. A pullback without breaking the uptrend will let us reenter the market. If this turns out to be a bear market rally, we may stay on the sidelines longer.
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.”
Small gains in the Futures Trend program keeps returns between 17% and 28% for this year. We’ve added a new $250K U.S. only portfolio for those traders only able to trade the U.S. markets. Performance can be seen in blue on the chart below. It is running a little behind two of the broader portfolios, but looks good. Because it is just a subset of the other futures markets, we expect the performance to continue as shown.
Group DF2: Daily Divergence Portfolio for Futures
Another month of small losses for the Divergence program, ranging from 1.5% to 2% and keeping the yearly returns at losses from 10% to 13%. As with the Equity version of this program, it looks for pauses in an uptrend to capture a profit of about 6 days. This is the largest downward swing we’ve seen and we are optimistic that it will be back on track soon.
Blogs and Recent Publications
Kaufman’s“Learn To Trade: Trade To Win with a Rule-Based Method”
Is 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 as a print or ebook (both in color) on Amazon using the following link:
Don’t forget, “Kaufman Constructs Trading System.” You can also find it on Amazon or on our website, www.kaufmansignals.com.
Trading Systems and Methods, Sixth Edition
The sixth edition of Trading Systems and Methods is completely updated and contains more systems and analyses. You can find it easily on Amazon along with Perry’s other books.
An interview with Perry will be 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.
“The Real Risk of System Trading” will be published in the September issue of Technical Analysis of Stocks & Commodities
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.”
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.
Perry’s webinar on risk, given to the U.K. Society of Technical Analysts, can be seen using the following link: https://vimeo.com/708691362/04c8fb70ea
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.
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 (MoneyMentor.com) 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.
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
There is a new interview of Perry by Ali Casey, a Canadian podcaster. You can find it at https://youtu.be/7fGBUjlPENE. He asks some interesting questions.
An article by Mr. Kaufman, “Trading a Moving Average System” in the January Technical Analysis of Stocks & Commodities shows the best rules to use for with a moving average.
We managed to finish November with a webinar for MetaStock, Trade View (Australia), and two for FinecoBank (Milan), in English and Italian. You will be able to find recordings of the MetaStock and Trade View presentations by going to their websites.
For those practicing their Spanish, Mr Kaufman has an article being published in Hispatrading, an on-line Spanish technical analysis magazine. It is about how to execute a trend-following strategy.
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.
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: https://youtu.be/bh2fA8oBwBk
November 1, 2020, Mr Kaufman taped a session with Andrew Swanscott’s BetterSystemTrader.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.
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