June 2022 Performance Report

Industry Benchmark Performance                                                              

Losses in the equity funds are smaller than the equity ETFs, as are the total returns for the year. CTAs continue to increase gains or hold steady. Good news for the futures industry.

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.

June Performance in Brief

The Daily and Weekly Trend programs gave back their gains for the year, but flat is better than the S&P and Nasdaq returns of minus 20% and minus 30%. Because of extreme risk, we exited all positions in both the daily and weekly Trend portfolio, but are likely to reenter any day now.

The Timing program has been out of the market for quite a while, holding onto its 5% gain for the year. It will not enter until there is signs of an uptrend, then a pullback. There is no way to tell when that might happen, and there is no way to know if the market will take another leg down or start its long recovery.

The bright spot is Futures, which continues to post gains, much like the Futures funds in general. This is a case similar to 2008 where the downward trend is big enough to allow short sales to generate a profit. In most cases, drawdowns are fast, volatile, and recover before profits can be captured.

Major Equity ETFs

The S&P is now down 20% for the year and Nasdaq down 30%. Not a good start. The DOW is doing better by having less speculative stocks. We all know the reason for the current sell-off: mainly inflation resulting in higher interest rates. That in turn depressed demand, house sales, and investor confidence. While there is no technical sign this is over, gas prices have come off from their peak, and last Thursday’s natural gas price was down by 17%. Gas seems to be the focus of spending. Now pundits are speculating that the Fed will raise rates slower. I’m not sure how that will affect the final outcome unless inflation falls and removes the need to keep raising rates. We will know when it happens.

CLOSE-UP: Strategies That Continue to Work

It may be a bit late to be talking about trading a bear market because it could be over at any time — or not for a few more weeks or even months. But traders have a difficult time switching their mindset from a bull market to a bear market. Finding a strategy that works for both can be elusive.

Bull markets are the norm. The stock market, even after the financial crisis of 2008, and the current bear market, is still biased to the upside. That’s why the Dow was at 72 in 1921, 824 at the beginning of 1980, 11,484 at the start of 2000, and now is 31,500. Looking at it that way, prices are going up at a faster rate.

Then it’s not surprising that we continue look for an opportunity to buy stocks even when they are trending lower. For those of us who use trading strategies, not all are good in a bear market. We often have rules that take advantage of the upward bias.

I’m going to show you three fully systematic strategies that have done well over time and have continued to do well during the recent bear market. They all have modest drawdowns, but I think you will be impressed by their performance. We will apply them to the S&P ETF, SPY from 2000, so that we include the dot.com sell-off. We will also look at futures (ES) to see if the performance is different.

The three methods are, from the simplest to the more complicated:

  1. A long-term trend, long-only
  2. The 3-day trade, long and short
  3. Buy and selling drawdowns, but only in the direction of the trend

A Long-Term Trend

It may sound boring, but a long-term trend applied to SPY or ES works nicely. My favorite has been 110-day moving average. If we buy when the trendline turns up and exit when it turns down, we get the following results (January 2000 through June 26, 2022) comparing SPY with the S&P futures ES (Figure 1):

Figure 1. Comparison of SPY and ES moving average results from 1999.

While futures look much better, we used an investment of $25,000 compared to SPY with an investment of $10,000. If we adjust down ES to the same size we get a return of $1,042,540. Because we cannot trade futures without a large reserve, we also adjust down another 60% to represent the normal reserve needed. That brings the final returns down to $417,016, still better than SPY. However, all the other statistics are similar, as we should expect.

With both SPY and ES, short sales produce losses. That is why we only take long positions in most equity index markets.

A chart of SPY (Figure 2) shows a 110-day average with buy signals (in blue) and sell signals (in red). It would have exited longs on April 5th at 451.03. With prices now at 389 (on 6/27), a long-only strategy avoided a loss of more than 13%.

Figure 2. SPY with a 110-day moving average.

It is interesting to see the pattern of profits from long and short positions. It explains why, even with large gains in shorts during the internet collapse and the financial crisis, the bull market eventually takes away all those gains (Figure 3).

Figure 3. Returns of long and short sales for SPY using a 110-day moving average.

Nasdaq

A fast look at Nasdaq, both the ETF (QQQ) and futures (NQ) shows a similar picture. Figure 4 (left) is the moving average optimization of QQQ and right is the test of NQ. Nasdaq is best using a 120-day moving average compared to 110 days for the S&P.

Figure 4. Nasdaq ETF (left) and futures (right) show a similar performance profile.

The 3-Day Trend

Those of you who have followed my writing, know that I have always liked this short-term trading method. It is a simple pattern with no trend component and works for both long and short sales. For shorts, it does better with futures because the leverage allows you to profit from smaller downside moves.

The rules for trading S&P futures are:

  1. Buy on the close of the second lower close
  2. Exit longs on the close of the fourth day after entry.
  3. Take profits on longs using a 10-day average true range with a factor of 1.75 measured from the entry price.
  4. Sell short on the close of the third higher close
  5. Exit shorts on the close of the next day
  6. Take profits on shorts using a 10-day average true range with a factor of 3.0, measured from the entry price.

You can see from the entry rules that this method is biased towards long positions. It enters sooner and holds longer. Testing SPY from 1999 through June 26, we get the results shown in Figure 5:

Figure 5. Results of the 3-Day Trade applied to SPY from 2000.

While the shorts shown in Figure 6 are much less profitable, they are still profitable and recent returns are good. As we should expect, there is a clear bias towards long trades the recent downturn in the market has produced steady gains.

Figure 6. Returns of the 3-Day Trade applied to SPY.

Because this is a mean reversion strategy, it is best applied to the equity index markets rather than individual stocks. You will find the results equally as good applied to the Nasdaq ETF and futures.

Buying a Pullback Within a Trend

Every trader wants the best price, and buying a pullback while the trend is still up is one good way to achieve that. We take advantage of the upwards bias while timing the entry. The one disadvantage is when prices move higher without a pullback. We miss the trade. But there are drawbacks to every strategy.

We use our favorite 110-day moving average for the underlying trend of SPY. For timing we will use John Ehlers’ Hann Filter, a way of smoothing momentum using cycles, John’s expertise. Looking back at the 3-Day Trade, we may also think of those trades as taking advantage of price cycles.

The rules and parameters are:

  1. A 110-day moving average for the trend
  2. A 20-day momentum for the Hann filter (“momperiod”)
  3. A 3-day average of the Hann filter (“Hann”) used as a trading signal (“signal”)
  4. Buy when the Hann filter crosses above the Hann signal line and the trend is up.
  5. Exit the long position when the Hann filter crosses below the signal line or the trend has turned down

Note that this strategy is long only. As we will see, short sales were nearly break-even, but that’s not good enough. Figure 7 shows the recent trading signals. The Hann filter in the lower panel is much smoother than a typical momentum indicator.

Figure 7. Entering SPY on a pullback. The Hann filter is in the lower panel.

Figure 8 gives the returns, profit factor and percentage of profitable trades. Results are good for SPY long trades but near break-even for short sales. Figure 9 shows the equity curve.

Figure 8. Results of using a trend with a Hann filter for entry timing, applied to SPY.

Figure 9. A TradeStation chart of the SPY equity using the trend with a Hann filter for entry timing.

The calculations for this are more involved than the two previous strategies. The 110-day average is familiar, but the code for the Hann filter (momentum) is shown in TradeStation’s EasyLanguage, very similar to BASIC and many other development platforms:

  • deriv = close – open;
  • filt = 0;
  • coef = 0;
  • for count = 1 to momperiod begin
  • filt = filt + (1 – cosine(360*count/(momperiod+1)))*deriv[count-1];
  • coef = coef + (1 – cosine(360*count/(momperiod+1)));
  • end;
  • if coef <> 0 then filt = filt/coef;
  • Hann = (momperiod/6.28)*(filt – filt[1]);
  • signal = average(Hann,signalperiod);

Summary

No strategy is perfect, and they all have drawdowns. These three strategies would have avoided the largest drawdowns and the 3-Day Trade would have added profits during the current price decline. While it is still tempting to think we can capture a large profit in a bear market, it is not easy.

Trading systems are a way of adding discipline to your trading. They help keep losses to a minimum and generate profits in a relatively predictable manner. If you are trying to achieve returns higher than the risk-free government notes, then accepting and planning for higher risk will be necessary, but the reward is worth the effort.

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.

We gave back our profits for the year in both the Daily and Weekly Trend portfolios. Still, we are in good position compared to the other equity index markets. Our programs have been out of the market for the past two weeks due to a combination of high volatility and losses. We measure those in our portfolio, not in the stocks themselves. As of today, volatility have fallen to below our threshold, allowing us to reenter. We are just waiting for a positive sign of some sort of rally.

Income Focus and Sector Rotation

This program profits from interest income but only when we are long interest rates. That happens when rates are declining. The Daily program was able to exit long positions faster than the Weekly program, which can be seen in the recent declines in the Weekly returns. We are out of all positions for now, waiting for rates to start back down, as they always do.

Sector Rotation

A modest loss in June puts this program down about 11% for the year. The problem seems to be that sectors are rotating faster then we can track it. Energy was the outstanding market until is stopped. It’s not clear what sectors are best now, if any. Meanwhile, the program will keep trying to find those sectors.

DowHedge Programs

Both Daily and Weekly DowHedge posted losses in June, putting them both down around 11% for the year. The Weekly program exited on high volatility and may reenter at any time. The Daily program has stayed in the market, which is why it shows a larger loss this month. They DOW seems to have been less volatile than either the S&P or Nasdaq and we expect it will be the first market to signal a recovery.

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.

The Divergence program is performing much like the overall market, which is a disappointment. It is the fastest trading program of our group but looks for a pause in the trend to enter, then exits when the trend resumes. At the moment, that doesn’t fit how the market is moving.

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 has now been out of the market since April 25, about two months. During that time, the overall market has dropped 20% to 30%, so it has been a good strategy. The program is waiting for a medium-term uptrend, then a pullback to enter. We will still have a week or two before that can happen. Meanwhile, it has a 5% gain for the year.

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 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.”

A bright spot in this difficult period is the Futures Trend program, posting 4% to 7% gains in June, and higher by 15% to 25% for the year. The equity trend looks good and futures can turn quickly when rates, energy, or the US dollar change direction.

Group DF2: Daily Divergence Portfolio for Futures

Losses from 3% to 8% in June puts the 2022 returns lower by 10% to 12%, a sharp contract to the Futures Trend program. This is a fast trading program looking for pauses in the trend. While this pattern is not working right now, the program has a history of volatility and recovery.

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.

June 2022

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.

May 2022

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.

March 2022

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. Go to her website.

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

January 2022

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.

November 2021

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.

September 2021

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.

July 2021

 “Playing It Safe with Cryptos” appeared in Technical Analysis of Stocks & Commodities. It’s a challenge trying to trade these markets given their extreme volatility.

Book Interview

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.

You will also find back copies of our “Close-Up” reports on our website, www.kaufmansignals.com. You can address any questions to perry@kaufmansignalsdaily.com.

© June 2022, Etna Publishing, LLC. All Rights Reserved.

1 thought on “June 2022 Performance Report”

  1. Matthew Richardson

    Thanks so much for this post. It’s very informative.

    I had a question about the 3-day long-short mean reversion system on stock index futures. Does this approach utilize a fixed fractional position sizing method, and if so, what is it? If not, what is the starting capital and position sizing method?

    Thanks,
    Matt

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