Industry Benchmark Performance
The financial news is claiming this is the worse quarter since COVID three years ago. A reporter names this as the “gray swan” because it was so difficult to identify and take defensive action against “creeping” risk.
Early reporting only shows long equity as taking a modest loss, but I expect more to come. This report is being posted on April 2st, and the administration is going to announce tariffs later today. Everything can change!
Source: BarclayHedge Indices.
Kaufman’sMost Popular Books (available on Amazon)
Trading Systems and Methods, 6th Edition. The complete guide to trading systems, with more than 250 programs and spreadsheets. The most important book for a system developer.
Kaufman Constructs Trading Systems. A step-by-step manual on how to develop, test, and trade an algorithmic system.
Learn To Trade. 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 in color on Amazon.
You can also find these books on our website, www.kaufmansignals.com.
Blogs and Recent Publications
Find Mr. Kaufman’s other recent publications and seminars at the end of this report. We post new interviews, seminars, and reference new articles by Mr. Kaufman each month.
March Performance in Brief
It would have been nice for our system to offset the declines in the stock market, but that didn’t happen in March. S&P volatility remained low and none of our rules got us out. As you can see, March returns were not good, but they are well within the historic norms. We still prefer profits to losses. I’ll show the history of drawdowns in the individual systems farther down.
As we did after 2008, seeing the pattern of decline has caused us to look at some new risk controls. Each major drawdown seems to have a new pattern. A financial reporter has named this the “gray swan.” More difficult to identify. We’ve made some improvements to risk controls, but we are still working at it.
Major Equity ETFs
Equities have been selling off all month, creating the worst drawdown since Covid. Markets are anticipating new tariffs and no one really knows what they will be, or if they will last. Markets do not like uncertainty. Tariffs are also likely to increase inflation, which puts the Fed in an awkward position. Federal worker layoffs plus inflation is a good combination for the Fed.
Insert Major Index
CLOSE-UP: Profiting from War
From time to time I look at defense stocks. The world always seems to be at war, and the U.S. is certainly a large benefactor of that. We provide arms, planes, tanks, and general support for conflicts. Sad to say, it’s a business.
Given the ongoing battle between Ukraine and Russia, I was looking for which companies were profiting. Someone must be doing well given the amount of money that has been flowing to Ukraine. Where are they buying their munitions? Their tanks? Their assault weapons?
I realize this approach seems mercenary, but investors want opportunities to capitalize on events. So bear with me.
Aerospace and Defense (ITA)
The most traded ETF for aerospace and defense is ITA. Chart 1 shows its history. Its major components are GE Aerospace (GE), RTX (Raytheon), and Boeing (BA).
Chart 1. History of the ETF ITA (Aerospace & Defense).
During the same period, from May 2006 to now, ITA has gained 556%. At the same time, the S&P index, SPY, has gained 382%. Therefore, ITA is ahead by 45%. Not a bad investment, especially as the stock market has sold off.
But now let’s look at the past three years while the Ukraine conflict has been in the headlines and U.S. aid has flowed. In my understanding, the money designated for Ukraine comes back to the U.S. in arms purchases, so the funding is self-serving. Where does it go? The ITA chart shows that something is driving the stock price up.
Just a note to say that I am not a fan of ETFs. They are a slice of the stock market and include many stocks that go nowhere. I prefer to trade the top 5 components of the ETF. In my studies that always beats the ETF returns, no doubt with more volatility.
If we look at the top three components of ITA over the past three years, we see mixed results, although far better than the S&P ETF, SPY. While the SPY gained 6.9% annually, these three companies gained 24%, even with Boeing a drag. Boeing is always a problem because their commercial aircraft has liabilities that their defense production does not (I hope!). Over the same period from 2022, ITA gained 14.4% annually; therefore, using the top three components was far better.
Chart 2. Largest ITA components compared to SPY.
Europe
We always focus on U.S. stocks, but there can be other opportunities. Many European stocks are listed on the U.S. exchanges and can be bought and sold as easily as U.S. Stocks.
Recently, Europe started its own Aerospace and Defense ETF called EUAD. Chart 3 is its history.
Chart 3. Europe’s Aerospace & Defense ETF, EUAD since inception.
According to the chart, there was little volume until the end of March. Note that buying began in January. It will be easier to understand by looking at the major stock components. The top five components account for 80% of the total ETF. They are:
- Airbus (EADSY)
- Safran (SAFRY)
- Rheinmetall (RNMBY)
- Rolls-Royce (RYCEY)
- BAE Systems (BAESY)
Chart 4 shows the returns of the five components of EUAD from January 1, essentially when the new U.S. administration took office. Since then, the European countries have decided that they need to protect themselves, with or without the U.S. As you can see, all of the stocks have rallied, with Airbus (EADSY) in the lead.
Chart 4. The top 5 components of EUAD.
Comparing U.S. and E.U. Aerospace & Defense
Tables 1 and 2 compare the top 3 components of ITA with the top 5 of EUAD, data both from January 1 through March 24.
Table 1. The top 3 components from ITA, with SPY, from January 1.
Table 2. The top 5 components from EUAD, from January 1.
It seems that companies specializing in warfare and arms continue to be in demand. Returns over time have been better than the major index markets. While I haven’t looked, I believe with lower risk.
Europe has become a new player. Recent political issues are causing Europe to rearm, if only to support Ukraine and future unknown events. For now, a portfolio of ITA and EUAD seems to be a good idea.
How I would Trade This
As I mentioned, I’m not a fan of ETFs. They tend to include too many stocks that are doing nothing. While that may lower the risk, but it’s not what I want.
For the European aerospace and defense, I would still use the ETF EUAD. It’s easier than trading on the European stock exchange, and the ETF has fewer components and seems to be doing well.
For the U.S. aerospace and defense, I looked at the components of ITA and decided that the major movers were GE, RTX, HWM, TDG, and perhaps NOC. Of course, there is no guarantee that they will continue higher, but those are the ones that I included when I showed the returns this year.
I would add ½ my position, equally weighted, then wait until they show a profit, then add the other half. I don’t have a plan for exiting at this time because defense stocks have been a good investment for a long time. So you’re on your own!
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 Income Focus, DowHedge, Sector Rotation, and the New High-Risk Portfolio
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 significant downturn.
Equity Trend
A loss of nearly 8% in March for the 10-stock and slightly lower for the 30-stock portfolios puts us in line with the industry – unfortunately! The Weekly Trend portfolio suffered from not being able to change positions as quickly, taking more of a loss in the tech stocks. We’re working to fix that.
But losses of this magnitude come regularly, as the following chart shows. While we prefer profits, allowing for drawdowns is part of why we can exceed the index.
Daily Trend Drawdowns
Income Focus and Sector Rotation
Not much word from the Fed about future rates, although we see that they have a dilemma. Higher inflation with lower employment. Their worst case scenario. Both daily and weekly programs lost between 1% and 3% and both are doing better than equities. We keep believing that a trend will eventually put us back on the right path.
Weekly Sector Rotation
Hard to believe that a loss of 2.6% in March is doing well, and the program is still higher by 4.6% for 2025. Trading financials, staples, and utilities may be conservative, but it seems to be the key for now.
DowHedge Programs
After the March loss of 3.4%, the daily DowHedge is marginally ahead for the year. The weekly program lost more, 7.8% for a net loss in 2025 of 6%. Still, the charts look good if the market stabilizes here.
High-Risk Portfolios
We did say this was “high risk.” Tech stocks have been battered and healthcare and biotech are not offering a respite. This program lost 10% to 12% in March and is lower by 13.5% and 16% for the year. Keeping in mind that these losses are well within the history of this portfolio. We would have preferred first having nice gains before the losses.
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.
Losses of 3.5% to 5.5% put this around average for the month and equal to the equity index markets. Losses for 2025 are also on the smaller side.
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.
As we’ve said before, buying pullbacks is a good strategy unless the market keeps going down! Still, the Timing program lost 3% to 5.5%, on the low side for March. While it’s given back recent gains, the pattern will look good if this turns out to be the bottom.
Futures Programs
Groups DF1: Daily 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. The “US 250K” portfolio trades only U.S. futures.
We showed the drawdowns for the equity program, now futures. The top chart are the $250K accounts and the next chart are the $1M accounts. The patterns look very similar but the $1M has larger drawdowns. I’m showing this to remind us that drawdowns are normal, although unpleasant.
The good news is that futures did not take a major loss in March, but most of the programs had fractional losses. On the other hand, we haven’t caught any major trend, so the overall program is down about 5%. For better or worse, the new tariffs to be announced could give us an opportunity for a sustained trend.
Insert Futures trend charts
Group DF2: Divergence Portfolio for Futures
Perhaps this is the year for the Divergence program. It had small losses in March and is down 2% to 6% for 2025. I like to think that, when it starts back up, it will continue. Ever the optimist!
Insert Futures Divergence charts
Blogs and Recent Publications
Perry’s books are all available on Amazon or through our website, www.kaufmansignals.com.
April 2025
Perry did a studio interview with Jeff Baccaccio (“Rfactory”) in London in March. It is a fine production and a good interview. He has put it on youtube. I hope you enjoy it.
YouTube: https://youtu.be/jmR359jHYBQ?si=IHQ5bVLijGFM19qF
Another article in Technical Analysis of Stocks & Commodities for April, “Do Stops Really Work?” The conclusion even fooled Perry.
March 2025
Perry looks at an old standard in “Revisiting the 3-Day Trade,” which appeared in Technical Analysis of Stocks & Commodities in the March issue.
February 2025
Another article, “Chasing the Market” appeared in the February issue of Technical Analysis of Stocks & Commodities. It answers the question, “Can you make money entering the market after a big move?”
Perry enjoyed the “Fireside Chat” at theSociety of Technical Analysts (STA) in London on Tuesday, February 11. It should be available for viewing on their website. He also taped another interview and we’ll let you know how to see it when it’s released.
He also posted “If you think the market will tank, here’s a plan” on SeekingAlpha. It has received lots of view and good comments, although it is advising deleveraging.
December 2024
“Overlooked Strategy Rules” appeared in the December issue of Technical Analysis of Stocks & Commodities. We tend to overlook certain rules that can make a big difference to results. This article looks at scaling in and scaling out of a position, delayed entries, correlations, and other simple but important rules.
October 2024
“Trading a Breakout System” was published in Technical Analysis of Stocks & Commodities. It looks at whether it’s better to enter on the bullish breakout, wait for confirmation, or buy ahead of the breakout. It’s a practical look at improving breakout results.
September 2024
Two articles posted by Perry, “The N-Day or the Swing Breakout,” (Technical Analysis of Stocks & Commodities) looking to see which is better. You would be surprised.
A look at deleveraging Artificial Intelligence stocks, a shorter version of the article posted in our “Close-Up” section. It appeared in Seeking Alpha earlier in September.
August 2024
“Theory Versus Reality” was published in the August issue of Technical Analysis of Stocks & Commodities. It discusses price shocks, diversification, predicting performance, and more.
July 2024
Perry posted a new article on Seeking Alpha, “Capturing Fund Flows.” It a good strategy for someone that wants to add some diversification. It only trades 3 days each month!
June 2024
Perry was interviewed on June 27th by Simon Mansell and Richard Brennan at QuantiveAlpha (Queensland, Australia), a website heavy into technical trading. It should be posted in a week or so.
“Trading Extreme Gaps and Extreme Closes” looks at daily patterns in stocks, published in the June edition of Technical Analysis.
May 2024
In the April edition of Technical Analysis, Perry again deals with risk in “How Professional Assign Risk.” It is another chapter in how to protect yourself.
Older Items of Interest
On April 18th, 2023, Perry gave a webinar to the Society of Technical Analysts (London) on how to develop and test a successful trading system. Check their website for more details, https://www.technicalanalysts.com..
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
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.
You will also find up to six months of back copies of our “Close-Up” reports on our website, www.kaufmansignals.com. You can address any questions to perry@kaufmansignalsdaily.com.
© March 2025, Etna Publishing, LLC. All Rights Reserved.