May 2022 Performance Report

Industry Benchmark Performance                                                                                            

Mostly small losses for both equity and futures funds in May, paralleling the major index ETFs. The notable difference is that futures have accumulated substantial returns for the year, while equity funds are still showing losses. At this point, both interest rates and the U.S. dollar have stalled, but energy and possibly a short equity position would contribute to positive performance for futures.

New articles and two webinars

Perry gave a webinar for the U.K. Technical Analysts (STA) on Tuesday, May 10 and for MetaStock the week of May 16. Links for both can be found at the end of this report.

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.

May Performance in Brief

The Daily and Weekly Trend programs had a good month, returning more than 7% and now posting positive returns for the year. Both Trend programs held mostly energy stocks which were volatile but kept moving higher. We were out of the market for a week to avoid extreme volatility but reentered in time to catch the last rally.

The Timing program is still on the sidelines waiting for an uptrend to develop so it can buy pullbacks. It is holding on to a 5% gain for the year. The futures programs were mixed with the Trend portfolio losing modestly but still well ahead for the year. The Divergence program is the opposite, gaining modestly but still posting losses for the year.

Major Equity ETFs

Equities made an attempt at recovering from its steep sell-off, with the DOW, SPY, and IWM posting gains of less than 1%, but Nasdaq losing -1.59%. Nasdaq continues to post the largest drop, now at -22%. The chart below shows that prices of QQQ and IWM are not lower than at the start of 2021. Financial news has some analysts saying that we’re near the bottom and others that there is more decline to come. That may add to a sideways move.

Given the headwinds of higher interest rates, supply chain issues, and inflation, it seems that it will a struggle to have a serious rally, but a fight between the bulls and bears is more likely.

CLOSE-UP: High-Dividend Stocks

Last month we looked at low-volatility ETFs and found that they were low volatility until they were not. They may have been low volatility when they were formed, but volatility has a way of surfacing everywhere. The market is always prepared to knock you off balance.

High-dividend stocks may be different. While they may have large price swings, they have steady income from dividends that can offset some of those declines. That could lead to lower risk while it always improves returns. Let’s take a closer look at that.

(Note that all the data for this report was downloaded from Yahoo Finance which gives you both the closing prices and the dividend-adjusted prices.)

High-Dividend Stocks

Individual stocks can provide high dividends. In many cases, the company management recognizes that shareholders are attracted to their stock mainly because of dividends. Some companies have never lowered their dividends and are called “Dividend Aristocrats.” A few of them are (in alphabetic order):

  • 3M (MMM), Industrial, 3.7% dividend
  • A. O. Smith (AOS), Industrial, 1.5% dividend
  • Abbott Labs (ABT), Healthcare, 1.5% dividend
  • AbbVie (ABBV), Healthcare, 4.5% dividend
  • Aflac (AFL), Financial, 2.5% dividend

To understand the range of results, we start with a utility stock, American Electric Power (AEP), going back to 1962. Chart 1 shows the stock price and the total return (the stock price plus the dividends). While the stock price is erratic, the stock + dividend returns are much smoother.

Chart 1. American Electric Power (AEP) with and without dividends, from 1962.

The normal price series had an annualized return of 1.83% with volatility of 21%. Adding dividends increased the returns to 7.92% and lowered the volatility slightly to 20%. Volatility is not affected because the daily price moves still dominate the returns.

AbbVie (ABBV)

ABBV has the highest returns and the highest dividend payment. To get that, you need to stay with it through some serious ups and downs. Data stared in 2013, so the impact of dividends will not appear as obvious as AEP.

Chart 2. AbbVie (ABBV) price and price with dividends.

Unlike AEP, this stock had a drawdown of more than 40%, including dividends. I am not sure that an investor looking for dividend income is willing to risk that much of their principle.

But investing in any one stock, whether looking for absolute price appreciation or dividend income, involves accepting a certain amount of risk. You never get more return without more risk.

High-Dividend ETFs

Rather than buy an individual stock, there are lots of ETFs claiming high-dividend returns. Some of the most popular are:

  • HDV, iShares Core High-Dividend ETF
  • VYM, Vanguard High Dividend Yield Index Fund
  • VIG, Vanguard Dividend Appreciation Index Fund
  • SCHD, Schwab U.S. Dividend Equity ETF
  • JNK, SPDR Bloomberg High Yield Bond ETF
  • SDY, SPDR S&P Dividend ETF

Do these funds return more than individual stocks? Do they have less risk? If we look at the major holdings of HDV, we get Exxon-Mobil (XOM), AbbVie (ABBV), Johnson & Johnson (JNJ), Chevron (CVX), JPMorgan (JPM), Verizon (VZ), Philip Morris (PM), Merck (MRK), Proctor & Gamble (PG), and Coca Cola (KO). I would not have guessed these to be high-dividend stocks, nor would I think they are low volatility.

Chart 3. Ishares HDV, with and without dividends.

Utilities

I had always thought that you bought utility stocks because they had high dividends and low risk. That the prices were stable but the dividend income made up for that. That turns out not to be true.

The largest companies in the Dow Utilities Index are American Electric Power (AEP), Dominion (D), First Energy (FE), and Center Point (CNP). Chart shows that the returns are more stable than the S&P, but the sell-off at the end of 2019 was just a bad for utilities.

Chart 4. American Electric Power with and without dividends from 2010

The same pattern appears in the Index, shown in Chart 5. Performance is stable but not immune from the 2019 decline.

Chart 5. The Dow Jones Utility Index.

Dividend Aristocrats

“Dividend Aristocrats” are those companies that have continued to raise their dividends. Exxon-Mobil (XOM) now pays 4.69%, CVX pays 4.46%, and Amcor pays 4.10%. Chart 6 shows the price history of XOM from 2010 and Chart 7 shows the history of dividends from 1962. Remember that, if the price declines, the percentage dividend is a smaller dollar payout.

Chart 6. Exxon-Mobil prices with and without dividends.

Figure 7. Exxon-Mobil (XOM) dividend history from 1962. (Source: Yahoo Finance)

Comparing Results

We have now looked at a sampling of stocks and ETFs that have had a history of paying high dividends. A summary is below in Table 1. All data is from January 1, 2010, which reflects the extended bull market, the sell-off at the end of 2019, the Covid pandemic, and our current sell-off based on high inflation and increased interest rates. That should be enough challenges for any market.

Table 1. Summary of results

The ratios in the two right columns show which markets have the best “payout,” that is, the best return for the least risk. SPY does well, with a ratio of 0.746. It’s maximum drawdown in in-line with the other markets. SCHD, with a ratio of 0.932 is the best. In all cases, the dividends greatly improve results, but that should be expected.

Dividends do not help the maximum drawdown because they increase returns only once each quarter, and by a small amount. Dividends give you a “total return,” which will always be an improvement.

Are High-Dividend Stocks and ETFs Better Than Other Stocks?

Yes and no. Ratios from 0.70 to 1.00 are much better than most stocks and somewhat better than the S&P. The S&P ratio from 2010 is 0.746, but history shows it will be under 0.50 over time. Drawdowns are about the same. If you are willing to take the risk, then ABBV has a 27% return with a ratio slightly better than the S&P.  SCHD has a 15.7% return with relatively lower risk.

One of the arguments for high-dividend stocks is compounding. The additional return from dividends, if reinvested, will significantly improve returns over time. The past 10 years is not a good example, because yields and dividends have been smaller, but compounding may be the single best ingredient for wealth.

High-dividend stocks and ETFs offer an alternative and can add diversification to your portfolio while they perform better than most other markets. But they still have risk.

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.

Both Daily and Weekly Equity Trend Programs posted gains of more than 7%, now showing profits of more than 6% for 2022. Both a mostly long energy stocks, which have been volatile but moving higher. Although the larger 30-stock portfolio have lower returns, they have also been more stable.

Energy stocks have outperformed the broad market by so much that we expect to hold those positions for some time to come. The energy embargos placed on Russia affect gasoline mostly, not natural gas as much. We could see prices much higher, but consumer demand is unknown. The trend for gas is still up, so we continue to hold those positions.

Income Focus and Sector Rotation

Small gains in both the Daily and Weekly Income Focus portfolios. Both are down for the year, but the Daily Program is doing much better and has now reentered the market. Both programs have held up during a difficult period, but history shows there will be a long period of declining interest rates that follow this inflationary rally.

Sector Rotation

May showed a small reprieve from the recent drawdown, posting a gain of 1.40%. Not much but a glimmer of hope. At the moment it is long medium-maturity interest rates, which have stalled out. The market continues to switch between sectors, interest rates, energy, and tech, making it difficult to capture profits.

DowHedge Programs

Both Daily and Weekly DowHedge posted small gains in May, an indication that the bottom of this sell-off might be near. This program has held up well, showing the largest declines in the Weekly portfolio which lags in switching stocks. Both are down modestly for the year but could rally to gains with little trouble. The program avoided its “hedge,” which occurs when the portfolio volatility exceeds our threshold.

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 struggling the most of all our portfolios, posting losses in May. It buys when prices stall during an uptrend, which has not had may opportunities, and those cases turned out to fail as uptrends. However, like all good systems, it will continue to look for opportunities, and when prices start higher it will be there.

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.

If this chart looks the same as last month, it is. The Timing program looks for a pullback in an uptrend and there have been neither. The chart looks good and the program has avoided all of the sell-off and the risk that goes with it. As the saying goes, “It is better to be out and wish you were in than in and wish you were out.”

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.”

Modest losses in all three portfolios but still well ahead for 2022, a nice comparison to the stock market, a difference of 20% to 30%. The chart below shows a good upward pattern, a combination of long interest rates and long energy. So far, so good.

Group DF2: Daily Divergence Portfolio for Futures

After a leg down last month, the Divergence portfolios all gained between 1% and 2% in May, trimming losses for the year to a modest amount. Similar to the Equity Divergence program, this strategy looks for pauses in a trend, both up and down, then takes a position expecting the trend to continue. The erratic moves in some of the markets have made this more difficult. Moves down tend to be more erratic and short-lived compared to higher price moves.

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 is completely updated and contains more systems and analyses. You can find it easily on Amazon along with Perry’s other books.

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 the 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.

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

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