March 2022 Performance Report

Industry Benchmark Performance                  

Generally better returns in March, but equity funds are still negative for the year. Futures are doing better with the BTOP 50 showing much better returns than the CTA index. The BTOP50 attempts to replicate the returns of CTA, but it seems to be optimistic this year.

New articles and an Interview

Perry posted four articles on Seeking Alpha in March:

  • 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 also a new interview with Sunny Harris at www.MoneyMentor.com. Yo can find it at:

https://anchor.fm/sunny-j-harris/episodes/Perry-Kaufman-Pontificates–Market-Pundit-and-Trader–Prolific-Author-and-Programmer–Perry-is-definitely-a-Guru-to-get-to-know-e1gf30s

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.

Don’t forget, “Kaufman Constructs Trading System.”  You can also find it on Amazon or on our website, www.kaufmansignals.com.

Kaufman’s Fast Strike Systems on MetaStock

If you are interested in short-term trading, look at Kaufman’s Fast Strike strategies. Contact MetaStock at 800-882-3040 or go online to www.metastock.com/kaufmana.

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.

March Performance in Brief

We are very pleased to have gained in nearly every portfolio in March, some posting outstanding returns. The Trend Portfolios are about 60% long energy stocks but are starting to replace them with more diverse holdings. The Timing program is buying pullbacks, which can be any of a wide range of stocks.

Futures are benefiting from long interest rates and long the U.S. dollar, which have also been on a run for the past few months. We expect that a lot of it is in the market now, so the portfolio holdings are likely to switch.

Major Equity ETFs

No one seems to have a good explanation for why equities have rallied this month. Perhaps all the bad news is already in the market. We know that the Fed will be raising rates quickly and might even get to 6%. That may be good news for balancing rates with inflation. Given all their announcements, that must be in the market. We don’t hear much about supply chain problems, some of which have not gone away. But we adapt. Traders have a short memory.

As a follow-up to last months comment on energy, the Figure below shows that both crude and XLE are not in the strong uptrend they showed last month. The erratic price move is reflected in the energy stocks which are uncertain in their direction.

CLOSE-UP: Buy Strength or Buy The Dip?

To judge from my own experience, buying the low of a move is very gratifying. Unfortunately, it doesn’t happen often. Usually, the price goes lower. In many cases, especially with stocks, the price recovers after some long, uncomfortable period.

I intentionally did not say “Buy Weakness” in the title. It implies too much of a negative, and there are strategies in which buying the dip works.

Let me tell you how this month’s topic occurred. I was looking to write about green energy and green companies. I found a website by a major institution that was recommending stocks that would, in their opinion, outperform in 2022. They are:

  • Beyond Meat (BYND)
  • Hannon-Armstrong Sustainable Infrastructure (HASI)
  • Sunrun (RUN)
  • UGE International, Canada (UGE)
  • Tesla (TSLA)
  • TE Connectivity (TEL)
  • Infineon Technologies, Germany (IFNNY)
  • First Solar (FSLR)
  • Vesta Wind Systems, Denmark (VWDRY)

These companies range from building electric cars to providing solar energy and reducing carbon output. There is no doubt that the world is heading in that direction, sooner or later.

Comparing Performance to the S&P and Nasdaq

Before judging these choices, let’s see what their price history looks like, and compare them to the S&P and Nasdaq using SPY and QQQ. We will need more than one chart to be able to see the returns clearly.

Figure 1 shows the prices of SPY and QQQ. Even with the recent downturn, there are substantial gains over the past 12 years.

Figure 1. The equity index ETFs, SPY and QQQ.

The first four recommended stocks are shown in Figure 2. The prices have not been adjusted so they begin at different places in 2010. BYND did not start trading until 2019.

Figure 2. Unadjusted prices of the first four stocks.

In Figure 3, the second four stocks are separated, with RUN, TEL, and VWDRY on the left scale and TSLA on the right scale. Without doing that, you would not be able to see the pattern of the other three.

Figure 3. Unadjusted prices of the second four stocks, with TSLA on the right scale.

What do these eight recommendations have in common? All of them are in a drawdown, well off their highs. I’m going to assume that they are recommended because they are strong companies and undervalued. The question becomes “is this a good time to buy?”

Value Investing

The goal of value investing is to find companies that are priced below their intrinsic value. Most stock analyst rate stocks as a “buy” or “strong buy” by how much price is below “value.” Examples can be found on Yahoo Finance if you scroll down on the right side of, for example, the GOOGL chart. Figure 4 shows a recent history of analyst ratings, their target price, and how that price compares to the current price. It’s a good resource for a value investor.

Figure 4. Yahoo Finance analysis of GOOGL.

Rules for Buying Strength or Buying the Dip

Before explaining the rules, you should know that I buy strength, so you need to be careful of my bias.

Buying Strength

Buying strength takes advantage of two important features: nearly all stocks keep going up, even though they have periods of drawdown and sideways trading. You can see that because the equity index markets keep going up.

The second feature is persistence. Stocks that are going up are most likely to keep going up. The stocks that are strong are the most likely to continue to be strong. We can’t predict how long they will continue, but it should be enough to generate a profit.

Using a trend is a good way to identify if a stock is going up. Use a trend of at least 40 days, best if it is 80 to 100 days to capture the bigger picture. If the trend turns down, you have an impartial judgment that you should exit and wait for the trend to start up again.

Buying Weakness

When a stock price is going down where do you buy? How do you know how far down it will go? How do you know it will go up after you buy?

While you get a good price, you are participating in a negative scenario. Is the stock going down because the company is failing? Is it going down with the rest of the economy and is not a reflection of its own management?

The only assurance that a declining stock is a good buy is that the analyst assures us that the company is financially sound. Even then, we have no way of knowing when the stock price will turn up.

One of the biggest faults in value investing is that there is no timing. The stock could turn up tomorrow or next year. None of us have a clue.

Buying a Dip

I want to distinguish between “buying weakness” and “buying a dip.” I see “buying a dip” as a smaller downturn within an uptrend. The long-term trend (40 or 80 days) is up, but prices have declined. You can buy and still use the trendline to tell you when to exit. A drawdown that does not break the uptrend is not going to be severe.

While you can improve your entry timing buying a dip in an uptrend, it reduces the number of opportunities. It is a good method, but you will need to scan stocks to find enough opportunities to qualify. And you want to see that this method worked for that stock over the recent past. The stock will need to have had a clear trend with moderate reversals.

Conclusion

Of the eight stocks in Figures 2 and 3, TSLA, TEL, and perhaps HASI and IFNNY are pullbacks in an uptrend. BYND, RUN, and FSLR would all be in a downtrend. You can easily verify the trend on any trading platform.

Before deciding to trade a stock because some analyst says it is undervalued, check it out yourself. Be sure it is still in an uptrend and that you know where it will turn down, and where you will get out.

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 conditions, and exit the entire portfolio when there is extreme risk or a likely drawdown.

An abrupt turn-around for the Equity Trend portfolios with the Daily 10-Stock Portfolio gaining 8.5% and the Weekly 10-Stock up a remarkable 23%. While the Daily program is still in a drawdown, the Weekly program is now staring at new highs. Most of this is the concentration in energy stocks, with a few defense stocks. We expect the portfolio will transition out of these sectors as they stall out.

Income Focus and Sector Rotation

This program is clearly swimming against the tide, but the dividend income has managed to offset most of the losses. The Daily Portfolio actually posted small gains while the Weekly Program was one of the few in our strategies to post a loss. Both are down for the year. With most of the Fed news in the market, we don’t expect much more pressure on this system.

Sector Rotation

The Sector Rotation program is having a more difficult time finding the sectors that will continue to lead the market. It did well this week being long interest rates, but has declined to buy energy. It is slightly down for the month. We will watch it to see what it does next.

DowHedge Programs

Another month of small gains for the DowHedge program. It still shows losses of about 2% for the year, but has had very little drawdown compared to other programs and to the overall market.

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.

Another good month for the Equity Divergence program, with the 10-stock portfolio gaining 7.6% and the larger portfolio gaining 3.3%. That puts the smaller portfolio ahead for 2022 and the larger one even for the year.

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.

Small gains in the Timing program shows performance steadily creeping higher, now up 6.2% and 3.2% for the year in the smaller and larger portfolios. This program stood aside during the recent drawdown in equities and is now built back a full set of positions.

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 good month of gains for the Futures Trend program, with the $500K posting the best 13% return. The chart below shows the jump, but all three portfolios have gained nicely and are back to all-time highs.

Group DF2: Daily Divergence Portfolio for Futures

Continuing its usual volatile pattern, the Divergence Portfolio gained 5% and 6% this month and all portfolios are positive for the year.

Blogs and Recent Publications

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 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 was released at the end of 2019 by John Wiley. It is completely updated and contains more systems and analyses.

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.

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.

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:

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.

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.

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

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