Kaufman Signals

June 2018 Performance Report

Industry Benchmark Performance

Reporting is only in for futures, with the BTOP 50 showing a gain of 0.67% and the SG Index a gain of 0.44%. A few equity hedge funds have reported, but then the ones with better performance tend to post faster, so we’ll look for very little change in June, much like the SPY, which was up 0.57%.

Blogs and Recent Publications

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

June Performance in Brief

Mixed performance in June, with the 10-stock Trend portfolio finishing up 2.9% after a large reversal in the tech stocks, then a partial recovery. Instability in the U.S. economy and its affect on our trade partners seems to be destabilizing the markets. Combined with expectations of higher interest rates, the overall picture is uncertainty, resulting in a continued sideways pattern.

Futures programs were mixed also, with the daily Trend down a little, Divergence up, and weekly Trend mixed. Weekly futures are still posting good gains for the year, as is the 10-stock Trend program. We’ll need to wait to see if anything unfolds in the market.

Major Equity ETFs. A new high in NASDAQ QQQ and the small caps IWM, but not the broader market S&P or the DOW. The S&P traded up above an earlier high, then turned quickly lower, mostly driven by changing stories about tariffs and restrictions of tech company deals with China. The market continues to react to on-again off-again news, but company profits are still expected to grow in the near term.

CLOSE-UP: Amazon Gobbles Up Another Industry

It happened again, last Thursday, June 28. Amazon bought PillPack and announced that it was entering the prescription delivery business. We all know that Amazon can deliver packages to your door before you even order anything, so medication should not be a problem. For now, they are targeting those people who need a large amount of medication, but this will lead to providing everyone with everything.

Figure 1 shows the reaction of Wal-Mart (WMT), CVS (CVS), Walgreen’s (WBA), and Rite-Aide (RAD). On the close of Thursday, Amazon was up 2.4%, WMT down 1.2%, CVS down 6.1%, WBA down 9.9%, and RAD down 11.1%. Those companies not as diversified, WBA and RAD posted the biggest losses. Note that Rite-Aid trades under $2, so it will be more volatile than the other stocks.

Figure 1. Amazon enters the prescription drug industry.

What can we expect from these stocks? Probably the same as happened when Amazon bought Whole Foods. Competitors, Kroger (KR), Wal-Mart (WMT), and CostCo (COST) all dropped. The weaker company, Kroger, fell 8.2%, but even CostCo lost 5.1%. Wal-Mart fare the best, losing only 2.0%.  Figure 2 shows what has happened since then.

Figure 2. Life after Whole Foods.

Amazon has gained 60% since just before it announced the Whole Foods purchase, but then Amazon keeps gobbling up companies. CostCo is up 40% from before the announcement, and even Kroger is higher by more than 20%.  Wal-Mart is only slightly higher, but Wal-Mart has a lot of other dynamics.

Strong companies, such as CVS, should recover quickly and structure a plan to compete. We expect Walgreen’s to rally as well, but Rite-Aide is the weakest and may struggle. Companies will learn to compete or be bought out,

And, The Rest Of The Market?

A rally then a set-back, another rally and another set-back. Technically, the trend is up but the market is weighed down by rising interest rates, and the expectation of continued increases, and what is not clearly a trade war.

Figure 3 shows that rising rates (falling Eurodollar futures) has caused the market to stall. The Fed raises rates when it is sure that the economy can absorb it, which would have been true if it wasn’t for the added effect of higher prices, and anticipated higher prices, because of new tariffs. The flattening of rates during the past month is the market telling us that all does not look as good anymore. History will show that the market tends to be right. It is possible that the Fed will “delay” the next interest rate hike to see how the economy reacts to tariffs. Meanwhile, more volatility seems the only easy forecast.

Figure 3.  Eurodollars and the S&P.

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 Trend Strength Index continues to be a leading indicator. It’s recent decline for over 60 to about 10 was followed by SPY following it down, the moving sideways. The indicator now looks poised for another decline, so deleveraging would be the safe move. There is a smaller chance that the bull market will be resumed.

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 of 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.

Gains in the daily Trend program and losses in the weekly program, but they are all holding onto profits for the year. The 10-stock daily program is far outperforming all others, up 18% for the year even after a large loss when the tech stocks reversed. The long-term performance still looks good for these portfolios, so we’ll let the market continue to sort out the direction.

Income Focus and Sector Rotation

Both daily and weekly programs posted gains between ½% and 1% due to a rally in interest rates (lower yields). The market seems to be resisting the idea that the Fed will raise rates another two times this year. With a possible trade war, the GDP might be disappointing and disposable income can decline.

Another loss for sector rotation shows the instability in the market. This traditionally profitable program is struggling to find sectors that continue to outperform the market. History shows that as soon as we get discouraged, the program starts to outperform.

DOW Arbitrage

This program was down in June but still holding on to gains for the year, much like the overall market. The small decline on the chart is followed by a 50% recovery, making it all seem normal. As with the other programs, this is a wait-and-see situation.

 

 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.

Small losses for the month and now mixed results for the year. The 10-stock portfolio remains ahead while the larger, 30-stock portfolio is negative. The picture in the chart remains steady, with the smaller portfolio looking more positive.

 

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.

Both portfolio posted gains in June but remain slightly lower for the year. The charts show a tendency to turn back up, with the 15-stock portfolio not far off all-time highs.

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.”

Losses in the daily futures Trend program ranged from marginally lower to off 3%. The weekly program fared better, mostly mixed and holding on to good gains for the year. The surprising difference between the two programs shows that some markets have been unstable, giving a short-term signal then reversing. Holding a weekly position is more forgiving in this type of market.

Group DF2: Daily Divergence Portfolio for Futures

Small gains in all Divergence portfolios in June still leaves the returns negative for the year and near the lows of the performance pattern. The program took one larger loss when it only had one position in the portfolio.

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 (http://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.

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