Industry Benchmark Performance
Small losses in most funds in November, but overall returns for the year are positive, with equity long posting the best performance. Futures returns are good, helped by the strengthening of the dollar and the steady rise in energy.
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
Don’t forget our new book, “Kaufman Constructs Trading System.” You can find it on Amazon or on our website, www.kaufmansignals.com.
Find recent publications and seminars at the end of this report. We post new interviews and reference new articles each month.
November Performance in Brief
Our benchmark 10-Stock Trend Portfolio is back to profits this year, with a gain of 5.1%, even after a few nasty days at the end of November. The Weekly 10-Stock Trend Portfolio continues to outpace the daily version and is now ahead by 33% for the year. Holding the same positions for the week turns out to be a better approach this year. Other portfolios posted small gains and losses and remain with good profits for 2021.
Nasdaq again seems to be the market favorite while the small caps and even the Dow are well off their highs. The last days of November showed much higher volatility and many traders too defensive action only to see the declines halt. What will happen in December? Our Close-Up report below tries to find an answer.
CLOSE-UP: ‘Tis the Season
When I think of December, I think of holidays and shopping. Shopping “officially” begins on Black Friday, although retail stores are encouraging buyers to shop early. I tried to go to the mall last weekend and found a line of cars trying to get into the parking lot that was already completely full. So how bad could retail sales be?
A Unique Year
This year we recovered from the Covid pandemic only to find ourselves in facing delta and now omicron. Inflation is higher than we have seen in many years, there are shipping delays difficulty getting some of the groceries we want, higher car prices, higher housing prices, crowded air flights, and you know the rest.
As a trader, I want to know if December will be strong or weak. This year seems more complicated than most, but don’t we say that every year? Averages often hide the extremes. Rather than look at the market as a whole, using the S&P, we will look at those sectors that seem to be most affected by the current economic situation, retail, travel, energy, home sales, and we will throw in corn.
We can use XRT, the retail ETF to get a broad picture of that industry. I don’t always believe that a sector ETF tells you what you want to know, because it includes too many companies that do nothing and dampen the results. Therefore, we will also look at Nordstrom’s and Macy’s.
All of the charts that follow will show the seasonal patterns over separate time periods. When there is enough data, we will show, for example, 1991-2009, 2010-2019, and the last two years, 2020-2021 minus December of this year (of course). We can then see how the patterns have changed.
Beginning with Retail in Figure 1, we see that the last two years have been very volatile. In the past, returns have varied ±5%, but recently we are seeing -15% to +35%. The +35% was only for last December, but the chart shows above average buying for the second half of last year as well as this year. Considering the supply chain issues, lack of salespersons, and higher prices, this rally should be a surprise.
Figure 1. XRT, the retail ETF.
Now we can look at two companies in the retail sector, Macy’s and Nordstrom’s, appealing to different demographics. Macy’s in Figure 2 has made a remarkable recovery from expectations of going out of business. In the typical seasonal pattern, we see prices gaining from January through April, and again in November and December during the past 10 years (the orange line).
Figure 2. Macy’s
However, the past two years have been much better. The gray line references the scale on the right and the peak in November is a gain of 35%. Given that the previous 10 years posted gains in December, and retail (XRT) is showing strength, we favor a good December for Macy’s and for retail in general.
Nordstrom’s (Figure 3) also shows strength in the last months of the year with volatility similar to Macy’s. We like it when we can see confirmation in other stocks.
Figure 3. Nordstrom’s (JWN)
Then there is Amazon, the elephant in the room. The three periods shown in Figure 4 confirm that shoppers are buying from Amazon every month. There is no apparent seasonality. It is difficult to think that this month, December, will show a decline in the stock price, triggered by lower sales. We expect higher prices.
Figure 4. Amazon (AMZN)
The picture that we see of retail is that shoppers will shop in December, regardless of fewer choices and higher prices.
Airline stocks have been one of the most volatile sectors, next to cruise lines (which we will show next). No one would get on an airplane for nearly a year, now everyone wants to go somewhere. Flights are full. We hear that Southwest, which is a domestic airline, has had fewer disruptions that the international carriers, but the charts don’t seem to show any difference. In fact, the patterns are remarkably the same during the past two years.
Figure 5. American Airlines (AAL)
Figure 6. Southwest Airlines (LUV)
What about this month, December? Last year December was strong and, unless we go back into a lockdown, it looks as though this December will also be strong. Everyone is getting to know the rules and they want to see family, friends, or just get away.
Royal Caribbean Cruise Lines
The industry most affected by the pandemic are the cruise lines. Prices are normally stable with gains during the winter when snowbirds flock to the south. The first months of last year and this year show large losses, followed by a steady recovery. Booking seems to stop after the new year, so we chould expect a sideways move for the next few months. Cruise lines have been the canary in the coal mine, the leading indicator of what travelers will do. Best not to take the risk.
Figure 7. Royal Caribbean (RCL)
It is a difficult decision whether to show gasoline or heating oil, but everyone in the North needs to heat their homes and winter is just beginning, so the choice is heating oil.
Heating oil prices are somewhat counter-seasonal. Refiners start production at the end of the winter, usually March, so that they have reserves by October. They need lead time to switch from gasoline to heating oil. However, prices are also sensitive to the weather, so we see in Figure 8 that prices rise in the first part of the year, then drop at the end of winter. But the older data uses the scale on the left, which shows small movement.
Figure 8. Heating oil futures.
The past two years have shown extremes. In the early months of the pandemic, heating oil and gasoline prices fell with the price of crude oil. No one was buying. Crude surplus was so extreme that spot prices went negative. No one took delivery because all storage was full. We can relate the recent rise in crude, gas, and heating oil to increased demand and restricted supply from OPEC. They are trying make up for losses over the past two years. We expect all oil product prices to remain high for a while.
We have included corn as representative of consumer prices. Corn has very predictable seasonality, except for this year. Normally corn declines from planting in the Spring to harvest in the Fall, with a few noted exceptions. The seasonal chart in Figure 9 supports that.
Figure 9. Corn futures seasonality.
Although the recent pattern shows a decline at the beginning of the year, it follows traditional seasonality during the summer. The sharp rise in prices at the end of the year usually relates to higher exports. It is not clear that Covid has affected the corn crop, or delivery (we are just past harvest). Nor have interest rates increased to justify a 20% gain in storage costs.
Corn futures are used for cattle feed, not human consumption. One would think that cattle and hog production is down. Even if it isn’t, prices in the grocery stores are higher for many reasons, none of which should be because of the price of corn.
It’s a dilemma. When the answer is not clear, it is best not to try to predict future prices. We can say that the trend is up, so following the trend would have you long from September.
The Big Picture
It is difficult to forecast specific price levels and even individual stock action. The market is not that predictable. Looking at the areas of the economy, retail, airlines, and home sales, show that stock prices are higher, so buyers are still buying. We can only expect that to last through December. There is no way to predict January yet. We hope that the charts and commentary help you make your own decisions.
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.
The charts below show a sharp rally off the lows of October, with the Weekly Program gaining over the daily portfolio. While trend following has its periodic setbacks, it has a good history of recovering. As with all algorithmic programs, it has the odds on its side, even if can be frustrating from time to time.
Income Focus and Sector Rotation
Mixed results in the Daily and Weekly Income Focus, but both fractional. Interest rates are in an uncertain phase, with the Fed tending towards raising rates and concerns that the new Omicron variant will depress the economy. There seems to be mixed messages every month. Given all the negative press that would hurt this program, results are very steady.
A small gain in November put this program up by 21% this year, on par with the S&P. Consistency is the key to success in this program. The current holdings are home builders, technology, and consumer discretionary, all of which have been performing well.
Both Daily and Weekly DowHedge portfolios took modest losses in November and remain higher by 7% to 8% for the year. This program has shown steady gains with small drawdowns and fast recoveries.
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.
November reversed the gains in October, losing 4% to 5% but holding on to reasonable returns for 2021. The patterns in the chart below still show equity near all-time highs.
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.
The Timing program managed a small gain in both portfolios, increasing the year-to-date gains to 43% and 19%. Even though it falls far short of 2020 returns, this program is outperforming all of our other strategies.
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.”
Mixed results in November but good returns for 2021, from 27% to 18%, well above the long-term average. Trends in interest rates, a rally in the U.S. dollar, and rising energy prices have contributed to good performance this year.
Group DF2: Daily Divergence Portfolio for Futures
Modest losses took away a good part of the year-to-date gains in this program, but its pattern remains in a volatile uptrend. The volatility is due to often having only a few positions that qualify for this divergence pattern.
Blogs and Recent Publications
Kaufman Constructs Trading Systems
You will find both an ebook and a print version of Perry’s new book, Kaufman Constructs Trading Systems, published on Amazon. It is a complement to Trading Systems and Methods. It takes you step-by-step through the process of developing a trading system, with many examples. Order it through our website, www.kaufmansignals.com or directly on Amazon.
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.
On Thursday, December 11, Mr Kaufman will be interviewed and recorded by Ali Casey of Statoasis in Canada.
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.
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.
There are two pending articles to be published in Technical Analysis of Stocks & Commodities. The first, “50 Years On,” is a recap of the most important lessons learned by Mr. Kaufman. The other article, “Trading a Moving Average,” looks at two key moving average rules as well as how to time an entry. We have no dates yet for the publication.
“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.
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:
There are new articles being published in Technical Analysis of Stock & Commodities. The next one is “Better Entries,” scheduled to appear in the May issue.
Mr. Kaufman will present to the technical students at the Universidad Politecnica de Madrid on February 3, 11 am CST. He will discuss risk and offer advice that comes from years of trading.
Technical Analysis of Stocks & Commodities published an article on Short-Term Patterns, with lots of computer code so that you could do it yourself.
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.
© November 2021, Etna Publishing, LLC. All Rights Reserved.