October 2020 Performance Report

Industry Benchmark Performance

Industry results showed small losses everywhere, no doubt due to the uncertainty of the upcoming election.

Blogs and Recent Publications – A New Book on Amazon!

 “Kaufman Constructs Trading System” has gotten excellent feedback. Thank you! 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.

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.

October Performance in Brief

We had mostly small losses in October, although some programs, such as the 10-Stock Daily Trend and the 10-Stock Weekly Trend had marginal gains. Returns were very good until the last few days of October when the tech stocks started a nasty decline. Everyone has a different way to explain the sell-off, but we see risk as very high and we will reduce our exposure. Most portfolios still have good year-to-date returns.

The Figure below says it all. NASDAQ (QQQs), after running up remarkable gains in the face of a failing economy, is off its highs by 11% as of Friday’s close. Other markets are not as bad but have a similar drawdown pattern. Even with that, QQQs hold an impressive gain for the year of 30%.

Meanwhile, SPY and the other major index ETFs either made marginal new highs or failed to make a new high. IWM, the small caps, are the weakest, a classic sign that investors are moving to safer stocks.

There should be a lot of volatility associated with Election Day and the days that follow. More about this in our monthly Close-Up below.

CLOSE-UP: Risk On – Risk Off

Capital Market Laboratories published a list summarizing our current market:

  • Fastest bear market ever
  • Shortest bear market ever
  • Fastest bull market ever
  • Fastest correction ever
  • Oil trading negative for the first time
  • Largest drop in GDP ever
  • Largest job losses ever
  • Highest closing VIX ever
  • And we have a Presidential election on Tuesday for which we may not know the results for few days.
  • And we are still in the midst of a pandemic.

Meanwhile, tech stocks and online businesses are thriving while many others are failing. There are those without any income and not enough food, and others who cannot pay their rent or mortgage now or in the foreseeable future.

As the Chinese saying goes, “We live in unusual times.”

Is this worse than the tech collapse in 2000, or the financial crisis of 2008? Yes, because it affects so many more people and threatens their health.

The Tuesday Election

We will go out on a limb and talk about the election. Looking back at the Dow returns for the 20 days before and after a Presidential election (since 1924), Figure 1 shows that the index was quiet ahead of the election, then rallied afterwards.

Figure 1. History of the DOW around the Presidential election since 1924.

The 2016 election was a surprise, and stocks dropped in advance, and even further during the night of the election. But then prices rallied more than usual (Figure 2).

Figure 2. Pattern of the 2016 Election.

This year prices are also volatile and leaning downward. But no one really knows what will happen. Figure 3 shows the SPY prices from October 1 through Wednesday, October 28. They declined further on Friday.

Figure 3. SPY prices from October 1, 2020 through Wednesday, October 28.

Volatility is important. Analysts are warning that we should take protection from anticipated volatility on or after the election. Figure 4 shows the VIX index and the volatility ETF UVXY from October 1. It seems that investors have already taken defensive action, selling UVXY ahead of the election. While VIX is the implied volatility of S&P options, it is not tradable. Only UVXY can be traded and that is where everyone seems to be running.

Figure 4. VIX compared to the tradable UVXY. Traders are selling volatility ahead of the election.

Forecasting Prices After the Election

We will risk looking stupid because no matter how we interpret the market, it has a mind of its own.

We expect the market to rally after the election. We have three reasons:

  • If Biden wins, we can expect a large stimulus package.
  • If Trump wins, we can expect favorable business policies to continue.
  • Regardless of who wins, everyone will be relieved that it is all over and buy the market.

Protecting Your Portfolio

Here is our best advice, but it applies to everyone and it may not fit your own financial situation:

  • Rather than selling volatility, you can reduce your exposure by reducing your positions size. In Figure 4 we see that everyone else has already sold volatility. There is no opportunity there.
  • You can sell a broad index, such as SPY, or a leverage SPY, to offer some protection. The move in SPY may not be highly correlated if you have a focused portfolio, so it may not offset as much as you like.
  • If you are in mostly tech stocks, then hedging with the ETF XLK would be better. You only need to hedge 25% to 50% of your exposure to keep risk under control. Then, if it turns out there is no sell-off, you only lose a small amount of potential profit.
  • If the market moves sharply in your favor you can take profits on 50% of your portfolio and wait for volatility to drop before resetting. History shows that high volatility does not translate into large profits, but it always has high risk.
  • Monitor your risk. If your normal risk level is 12% (one standard deviation of your daily portfolio returns times the square root of 252), and your risk goes to 18%, then reduce all positions to 12/18 = 0.60. That is a 40% reduction to get it back to 12%.
  • Do not try to outsmart the market by investing in a stock that might surge if one or the other candidate is elected.  Predicting rarely works.

See you after the election!

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 portfolios. Our review of using inverse ETFs to hedge stocks during a decline showed that downturns in the stock market are most often short-lived and it is difficult to capture those moves with trend systems. This confirms our approach to the Timing systems, which hedges up to 50% of the long stock risk using multiple trends. In the long run, returns from the hedges are net losses; however, during 2008 the gains were welcomed and reduced losses.  In any correction, we prefer paying for risk insurance, even without the expectation of a net gain.

Portfolio Methodology in Brief

All the programs — stocks, ETFs, and futures — 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, 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 out-performing 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 are simulated but the newer returns are the systematic daily performance added day by day. Any changes to the strategies do not affect the past performance, unless noted.

Groups DE1 and WE1: Daily and Weekly Trend Program for Stocks, including Sector Rotation, Income Focus, and Dow Arbitrage

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.

After making new highs for the month, the Equity Trend portfolios sold off sharply. Still, the smaller portfolios netted a gain for the month. The charts below show the volatility in the most recent month. These programs have outperformed all year and it may be that the combination of election uncertainty, increased covid cases, and overvalued stock prices will cause a noticeable retreat. Our programs are reducing exposure.

Income Focus and Sector Rotation

The Daily Income Focus program posted fractional losses and still holds a 2.2% gain for the year. Given the exceptional volatility of recent months, the performance looks stable. The Weekly program is still struggling, losing more than 1% in October and now off 5.4% for 2020. It is unusual, but interest rates have been bouncing up and down all through the covid pandemic.

Sector Rotation

Another small loss added to a year that has not gone well. One would think that this program would have found the tech sector and held on, but prices have not been that smooth or that predictable. Eventually this program will recover, as it has for the past 20 years.

DOW Hedge

A fractional loss in October leaves the Dow Hedge program up by 11.4% for 2020, well ahead of the DOW which is down 5%. This pattern looks about as good as any of the portfolios.

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 month of small losses but holding on to gains of 28% and 11% for the 10- and 30-stock portfolios. This has been a good year for short-term programs looking to be long on either a pullback or a pause in the trend. This program looks for pauses.

Group DE3: Timing Program for Stocks

The Timing program is a relative-value arbitrage, taking advantage of undervalued stocks relative to its index. Its primary advantage is that it does not depend on market direction for profits, although these portfolios are long-only because they are most often used in retirement accounts.

This strategy seems made of the 2020 market, buying on pullbacks that are identified as oversold. The program managed a small profit in October and now shows a 53% gain in the 10-stock portfolio and a 64% gain in the 20-stock portfolio. While this is clearly an unusual year, as seen in the chart below, it had a steady return before this.

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 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.

Using the same strategy and portfolio logic, the Weekly Trend Program for Futures has the added smoothing resulting from looking only at Friday prices. While it will show a larger loss when the trend actually turns, most price moves are varying degrees of noise which this method can overlook.

Please read the report describing our revised portfolio allocation methodology. It can be found in the drop-down menu under “Articles.”

A second month of modest losses still leaves this program up by 10% to 17% for 2020, a good showing, especially compared to other futures funds. All portfolios are still showing an uptrend in equity.

Group DF2: Daily Divergence Portfolio for Futures

Another month with the same pattern for the Divergence program. This time posting small losses, but turning the year-to-date returns negative.  Returns seem to be in the middle of the swinging pattern, so there is no predicting next month.

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 the last week of October by John Wiley. It is completely updated and contains more systems and analyses.

MetaStock Strategies

MetaStock issued an upgrade to the Kaufman Fast Strike add-on in late January. This add-on has three short-term trading systems, holding positions for one to three days in two of the programs, and about one week in the third program. They trade noisy markets, including most major index ETFs and futures, plus one program trades the VIX. You can see a description of the programs and a record of past performance on MetaStock. Anyone interested should contact MetaStock at 800-882-3040 or go online to www.metastock.com/kaufmana

October 2020

Mr. Kaufman has a full schedule in October and November.  You can find videos and recording of the following sessions:

  • On October 3 he addressed 1,000 members at the Indian Technical Analysis group. See  https://www.algoconvention.com/schedule for more information.
  • On October 10 he recorded a session on volatility and risk for TopTradersUnplugged.com
  • On October 22 he addressed another large group for the Italian bank Fineco (in Italian).
  • On November 1 he will tape a session with Andrew Swanscott’s BetterSystemTrader.com
  • On November 18 he will present again to the Italian bank, Fineco, this time in English.
  • On November 27 he will again present to Fineco subscribers in Italian.

Mr. Kaufman will be presenting in a webinar for the Indian Technical Analysis group in Mumbai on October 3. The presentation will be geared towards beginning to intermediate traders. You can find more at https://www.algoconvention.com/schedule

September 2020

“Fools Rush In,” an analysis of the best time to buy an IPO, will be published in the September issue of Technical Analysis of Stocks & Commodities. There is also a full description of Kaufman Constructs Trading Systems in the “Books for Traders” section.

June 2020

Mr. Kaufman gave a presentation at Jake Bernstein’s “Cycle” seminar. Anyone interested in a copy of the presentation should send a request to kaufmansignals@gmail.com.

The June issue of Technical Analysis of Stocks & Commodities published the article “Crashes and Recoveries.” It will help you figure out how the Covid-19 pandemic will play out. It will also have the TradeStation code for the “2nd Cross” strategy, requested by readers.

March 2020

There are some comments in the April issue and on the current stock market drawdown and a correction to Mr. Kaufman’s article in the March issue of Technical Analysis of Stocks & Commodities

February 2020

“The 1st and 2nd Cross” was published in Technical Analysis of Stocks & Commodities in the March issue. It is based on an idea of Linda Raschke and captures small but reliable pieces of a trending move.

January 2020

A new article “Essential Math For Traders” will be published in the Bonus 2020 issue of Technical Analysis of Stocks & Commodities.

ProActive Advisor Magazine (on-line) published “Controlling risk that doesn’t go away,” posted on January 15.

Both of these articles are important for understanding your investment risk.

December 2019

Technical Analysis of Stocks & Commodities published an interview with Mr Kaufman in the December issue.

MetaStock Seminar held in Sunnyvale

Mr. Kaufman was a keynote speaker at the MetaStock conference in Sunnyvale, November 3. You can hear this presentation by going to the MetaStock website.

November 2019

Technical Analysis of Stocks & Commodities published “Running for Cover,” an article by Mr Kaufman that looks at whether buying bonds after a sudden drop in the S&P can still be profitable.

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.

Mr. Kaufman spoke in Tokyo and Osaka to the Japanese association of Technical and was a keynote speaker at the 2018 IFTA conference in Kuala Lumpur, both last October. You should be able to get a copy of the presentations by MATA, the Malaysian Association of Technical Analysts.

 “In Search of the Best Trend” was published in Technical Analysis of Stocks & Commodities in July 2019. An article on “Defense is Your Best Defense” will appear in ProActive Advisor Magazine also appeared in July 2019.

Mr. Kaufman was a keynote speaker at a number of IFTA conferences, the most recent in 2018 in Kuala Lumpur, and Milan in 2017. You can find his presentations on their website.

You will also find many articles posted under Articles on our website, www.kaufmansignals.com. You can address any questions to perry@kaufmansignalsdaily.com.

© October 2020, Etna Publishing, LLC. All Rights Reserved.

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