Kaufman Signals

June 2019 Performance Report

Industry Benchmark Performance

Nothing seems to hold the stock market down. If there is bad news, it expects the Fed to lower rates. If good news, everything is fine. Hedge funds are lagging the major index markets but still putting in a respectable performance for the year. Overall CTA performance is also good, although the BTOP50, a more realistic measure, is somewhat lower. Altogether, a lot of positive numbers.

MetaStock Announces Kaufman’s Fast Strike Systems

See this month’s “Close Up” section and also the end of this report, Blogs and Recent Publications, for more information.

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

A much better month but still lagging the broad market indexes. Normally, we would think this was good performance for the first half of the year, but the rebound from lows in December gave the market a windfall profit. All of our portfolios are profitable. Our best equity portfolio is Divergence, now up 18.5% for the year.

Daily futures continue to outperform, with the small trend portfolio up 18% for the year, and the futures Divergence portfolios up from 15% to 24%.

Major Equity ETFs. Another reversal from a sell-off to a rebound. Neither NASDAQ nor IWM have made new highs but the S&P has managed a small gain over the previous highs. Before the sustained bull market, the S&P typically made a new high before reversing. The overall picture looks as though the market only needs some good news to break above the 2018 highs.

CLOSE-UP: Announcing New Short-Term Trading Programs

We are pleased to announce the launch of three short-term trading programs as an add-in to MetaStock. Each targets a different concept. The advantages of shorter trades are:

  • You don’t give back a large part of your gains as you do at the end of a long trend.
  • You have a much higher percentage of profitable trades, between 50% and 80%.
  • You are out of the market as much as 50% of the time which reduces your chance of a bad price shock and reduces overall risk.

The add-in is called the Kaufman Fast-Strike Systems. The following is a brief description of each strategy:

STRATEGY 1: Kaufman’s Short Cycle for Index ETFs, Index Futures, and Some Other Markets

Prices move in patterns. They have since the 1950s and continue today. You just have to uncover them,  such as the idea of “Up on Monday, Down on Tuesday.” One of the great patterns was recognized by Robert Joel Taylor. Although he had many qualifying rules, the essence of the program was a 3-day cycle. If stock prices decline for three days, then buying and holding for a few days was a consistent, profitable approach. It still is, although there needed to be some adaptation to today’s markets.

Because equity index markets are very noisy, they change direction often. We can enter a long position on the close of the third day down and set a profit target based on volatility. Because of the upwards bias in stock prices, long positions can be entered sooner and exited later than short sales. By acting faster for short sales, we minimize the risk but can still taking advantage of the fast sell-offs. There is an additional trend component, so the strategy will not sell short in a bull market or buy in a bear market. Short sales are best using the Short Cycle model with futures because it can capture smaller downside moves profitably due to the leverage available. Sample trading signals for S&P futures are shown below:

While this program is successful with highly liquid equity index markets in the US and Europe, it is also good with bonds and some other markets.  You can even try your favorite markets, but we don’t recommend individual stocks.

STRATEGY 2: Kaufman’s High Momentum

This program specifically targets the VIX complex and is best applied to UVXY or SVXY. The opposite of “overbought” and “oversold,” it takes advantage of extensions in high momentum, that is, when these markets become “overbought,” they continue to be overbought for a few days.

The volatility ETFs have a strong bias to the downside. Because VIX is determined from the volatility factor in options pricing, it tends to react quickly to trader emotion, rallying quickly and then declining slowly. Therefore, this program will favor the short sales, although the strategy has been profitable for both long and short signals.

All trading signals are calculated based on the closing price and signals are executed either on the following open or close. For example, if there is a pending short sale and prices open lower, then you should sell the open. If prices open higher but close lower, then you sell the close. For buy signals, the prices tend to move faster and so we only buy a higher open, not a higher close. Trades are held no more than two full days but can be shorter if the profit target is hit.

Profit targets are determined based on volatility and will vary in size from trade to trade. They can be executed at any time they are hit, even overnight, during the time that the trade may be held. Sample signals are shown below:

STRATEGY 3: Kaufman’s Short-Term Mean Reversion Strategy

This mean reversion strategy applies to those equity and futures markets that have a high degree of noise. That is, prices do not move up or down consistently but tend to appear erratic, even when in a long-term uptrend or downtrend. Index markets are notorious for doing this because of their high volume. Lots of traders and investors buy and sell continuously for different reasons, making the price pattern unpredictable.

Kaufman’s Short-Term Mean Reversion Strategy takes advantage of a technical oddity, the different lags in more than one trend following calculation. While we won’t tell you which ones, the time frame is short. One of the techniques will always have more lag than another, even using the same calculation period. We can take advantage of that lag to buy or sell short when one trendline crosses the other, then exit when they cross back. It’s a simple method that has been very successful, and simple is always good.

Once a buy or short sale signal occurs based on the closing price, you can enter on the concurrent close or the next open, results are similar. A profit target is set based on the average true range (a measure of volatility). There is also a low volatility filter because we don’t want to take trades when the prices are barely moving, even if the trendlines cross. There is a trend filter to avoid going short in an uptrend or long in a downtrend.

This program works best for noisy markets, such as equity index, the euro, and crude oil, and can be traded long or short. You still might prefer long only for the equities, and bond futures, and for VIX we prefer short only. A chart of trading signals for the SPY is below:

Enter Orders Before the Market Opens

All three strategies allow you to enter orders before the open or even just before the close. You do not have to be glued to the screen all day.

Performance Results

Rather than give the performance history, it is all available on MetaStock. There is a video explaining everything in more detail. You can see the trading signals, the Expert Advisor that tells you the orders every day, and there is a complete history of returns. That way you will be more comfortable seeing the risk and reward yourself. To learn more, contact:

www.metastock.com/kaufmana

or call 800.882.3040

 

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 is not showing strength in the S&P. It remains in a congestion area where it has spent a great deal of time for the past two years. The market has shown a tendency to recover rather that sell off here, but this indicator has a pattern of leading the S&P. We would expect no more than a slight rally.

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.

Even with returns of 4.5% to 7.5% in the Daily and Weekly Trend Portfolios, the charts look as though they are struggling. Still, having recovered from two nasty drawdowns, the programs can now pick stocks that are more likely to outperform. We had a good run in the tech stocks, but now it’s time to find the next sector to make a big move.

Income Focus and Sector Rotation

The market continues to believe that the Fed will lower rates two or three times this year, possibly even by 50bp next meeting. We don’t think 50bp is realistic, but the Income Focus program continues to outperform, now up 7.74% in the daily program and 6.47% in the weekly, not far below the annualized returns and we’re only halfway through the year.

Sector Rotation

This is another case where the chart doesn’t do the performance justice. This program gained 5.5% for June and is now higher by 8.4% for 2019. Normally, a very commendable return and good diversification.

DOW Arbitrage

This program made new highs one week ago and finished June up 6.22%, now up 14.78% for the year. It continues to have a quick recovery from drawdowns and has the best liquidity of any of our programs.

 

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.

With a gain of 6.4% in the 10-stock portfolio, this program is now fractionally ahead of SPY for 2019, up 18.5%. The 30-stock portfolio, with more diversification gained 3.8% in June and is now higher by 10.3%. Altogether a good performance.

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.

The Timing program buys undervalued stocks and hedges with one of the major equity ETFs when prices turn down. It is still showing a downtrend in the longest trends, so it remains partially hedged, preventing it from achieving any large returns. It still netted small gains in June and is ahead for 2019, but it’s been a difficult period, going nowhere, for this strategy.

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.”

Gains of 9.24% for the 250K Daily Futures Portfolio brings the 2019 returns to 18%. The more diversified portfolios gained from 4% to 5% and are still nicely ahead for the year. Because bonds seem to be driving the performance and the smaller portfolios have a larger proportion of bonds, they are outperforming.

The Weekly programs were all profitable but are lagging the daily programs, showing that there is instability in the price moves. The smaller 250K portfolio gained 3% for a YTD of 6.7% while the larger ones gained 4.7% and 1.8%. However, the charts below look a lot better!

Group DF2: Daily Divergence Portfolio for Futures

Gains of less than 1% in all portfolios still keeps 2019 returns up by 24% in the 250K portfolio and up 15% and 18% in the larger portfolios. Altogether a good showing for this program. The chart continues to show volatile swings but new highs. This program benefits from stops and starts in the trend, clearly the patterns that we are seeing this year.

Blogs and Recent Publications (for the past 12 months)

MetaStock Strategies

MetaStock has launch the Kaufman Fast Strike add-on. It 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

Article Pending

“A Simple Way to Trade Seasonality” will be published in the September issue Technical Analysis of Stocks & Commodities.

Book Interview

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

May

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

March-April

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

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

December

An article appeared in ProActive Advisor Magazine looking at all calendar patterns, including the Santa Rally, the Presidential Cycle for 2019, the January and May effect, and seasonal patterns in ETFs.

In January Technical Analysis of Stocks & Commodities will publish an article showing the real relationship between price and volatility, which will surprise you. It should change the way you size your positions.

October

Mr. Kaufman spoke in Tokyo and Osaka to the Japanese association of Technical Analysts on various techniques for trading Japanese markets. You can contact the organization for a copy of the presentation. Mr. Kaufman was presented with a Japanese translation of his newest book, A Guide to Developing a Successful Trading Strategy.

He also spoke about “Making Volatility Work for You” at the 2018 IFTA conference in Kuala Lumpur. It was an excellent conference with many good speakers. You may be able to get a copy of the presentation by contacting MATA, the Malaysian Association of Technical Analysts.

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 Advisor Magazine this week.

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 has been a keynote speaker at a number of IFTA conferences, the most recent this year in Kuala Lumpur, and the previous year in Milan. 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.

 

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