Industry Benchmark Performance
Another good month for all funds, with Equity Long outperforming, although lagging the 24% returns of the S&P. Futures trend programs are also putting in good performance.
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. This link is now working!
As of September 30th our system tracking had the following results for a sample of futures markets and Equity Index ETFs, and you can choose your own markets to trade.
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.
October Performance in Brief
Our benchmark 10-stock Trend portfolio recovered from last month’s losses and seems to be on the right side of the market. All other equity portfolios returned gains in October with the exception of the 10-stock Weekly program which posted a small loss; however, it has 23% returns for the year, similar to the S&P. Similarly, the Futures Trend program posted small losses while holding on to good returns for 2021.
Major Equity ETFs
Falling below the 50-day moving average did not turn out to be a signal of disaster. Prices of all the equity indices have strongly rallied with the Nasdaq QQQ leading again. Rumors of tech stocks falling out of favor seem to have been exaggerated. Perhaps the recent volatility in the tech sell-off has scared away some investors, which often leads to a rally.
CLOSE-UP: Fast or Slow?
Among the traders that I know, there are a few who only trade fast, that is, trends with calculation periods less than 15 days. Certainly, the stocks that have gotten the most attention, Telsa (TSLA), the meme stocks such as Gamestop (GME), and cryptocurrencies, namely DOGE-USD, seem to be candidates for fast trading.
With trend systems, we associate longer holding periods with larger drawdowns and greater risk. If we speed up our trading we will reduce the losses of individual trades, but what about a run of losses?
One problem with selecting stocks to test is ex post selection, our ability to choose stocks that we already know have had exceptional gains. Results will be distorted to reflect what you should have done to capture those gains.
We can look at what moving averages would have been best before these stocks were catapulted into the news. We can then look at how the trend speed would have changed as prices rallied. Then we only need to speculate on whether we would have recognized that something has changed and adapted our trading. You will need to decide that for yourself.
Our Candidate Stocks
To keep this interesting, we will look at Doge-coin (DOGE-USD), Gamestop (GME), Moderna (MRNA), Nvidia (NVDA), BankAmerica (BAC), Tesla (TSLA), Amazon (AMZN), and Boeing (BA). I think that gives us a broad sample.
Most of the markets in the news changed “overnight” on September 1, 2020. TSLA changed earlier on March 1, 2020 and Boeing on January 1, 2013. I used charts on Yahoo Finance to pick the dates that the pattern changed. Most stocks, like MRNA (Figure 1) were easy. I picked a date just before prices started higher.
Figure 1. Picking a start date for Moderna (MRNA).
DOGE, MRNA, NVDA, and BAC all had the same date. GME changed on November 1, 2020, TSLA and AMZN on March 1, 2020, and BA on January 1, 2013.
I then tested moving averages for 2010 up to the change date, using calculation periods from 5 to 120 days. I recorded the one with the highest net profits. The results, including the best trend speed, are in Table 1:
Table 1. Moving average optimization best results, 2010-2019.
There is an interesting range of solutions for 10-year period shown in Table 1. GME is the fastest, which should not be a surprise. Most choices uses slower trends to capture a gradual rise in prices. BAC was faster as it recovered from the 2008 sell-off. The far right column is the total return divided by 10 to give us a simple yearly average which we will use as a comparison later.
Testing the Most Recent 22 Months (Call it “2 years”)
The most recent 2 years includes the Covid pandemic in which some stocks, such as AMZN, were beneficiaries. We would expect tech stocks and those that had gained significantly to favor faster trends. Instead, it was the opposite, as seen in Table 2.
Table 2. Optimization from 2020 through October 2021.
The best calculation periods for the recent 2-year period were slower than the original 10-year test. I found that surprising. Normally, when you test a short data period, a faster moving average will turn out to be the best choice. The average best speed for the first 10 years was 83 days, and for the recent 2 years it was 101 days.
The two columns on the right (“Old Return” and “Old DD”) show what the returns would have been in the past two years had we used the best parameters from the first 10 years. The average of the old parameters was 122,494 and the new were 470,862. Our conclusion should be that slower is better.
Using the Same Trend Speed for All Stocks
My own preference is to use the same trend speed for all stocks. Some traders prefer to use different speeds, arguing that it gives them diversification. I think that using one speed gives robustness. You will need to decide which makes the most sense for you.
Table 3. Results of using a 100-day moving average for all stocks, all dates.
In Table 3, using a 100-day trend for all stocks, the average return during the first 10 years was 40,182 per year compared to the optimized return of 54,838. But the returns for the last 2 years were 759,722 compared to 470,862, significantly higher. I would use the same trend speed even if the results were about the same as the individually optimized solutions.
Let’s look at one of the extreme cases, GameStop (GME) where the calculation periods changed drastically from 10 days to 90 days. Figure 1 shows that most trend speeds produced losses during the test periods from 2010 through 2019, but the best gain was a 10-day moving average. There are also gains at the 100- and 105-day averages.
Figure 1. Gamestop moving average test, 2010-2019.
Naturally, the optimization chooses 10 days. But now let’s look at a test of the last 2 years in Figure 2. Of course, this was the period where social media targeted the short sellers of GME causing very erratic price moves. Originally, we thought that a fast trend speed would be best for capturing profits and avoiding risk. Not so. Figure 2 compares the profits of GME during the two test periods and Figure 3 shows the maximum drawdown.
Figure 2. GME profit comparison.
In Figure 2 you can’t see the profits from 2010-2019 because they are infinitesimal compared to the last 2 years. There are tiny blue bars at some of the calculation periods. But the last two years show a clear bias towards slower trends even while the stock price has bounced up and down – or perhaps because the stock price has bounced up and down.
Finally, look at the maximum drawdowns for the two test periods, shown in Figure 3. Most of the faster trends had larger drawdowns, and only the 10-day average had a good return with a small drawdown. We could see that as an outlier or a pattern that will not continue. The slower trends had normal drawdowns but much higher gains in a wider range of tests.
Figure 3. GME comparison of maximum drawdown.
You may already know that I believe that trend following only works for longer calculation periods. It is because it is intended to recognize the fundamental, economic trends driven by interest rate policy. Given a choice of a short-term or long-term trend with similar results, I opt for the slower.
I think you can see from the test results that using a slow trend, for both these very dynamic stocks and ordinary ones, is a better choice in both returns and risk. You may find a fast trend that works during a bull market, or over a short time interval, but they won’t hold up over time.
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 Daily Equity Trend program recovered sharply from last month’s drawdown. It now seem to be picking stocks correct and back on track. The Weekly program also recovered from a mid-month drawdown. We would like to think that drawdowns never happen, but it is part of trying to achieve returns greater than the broad indices.
Income Focus and Sector Rotation
Small gains in both the Daily and Weekly Income Focus portfolios. The weekly program is now positive for the year while the daily program is lower by more than 2%. It has been a struggle to offset higher yields with interest income but this program should continue its steady pattern of returns.
Another good month for the Sector Rotation program, which has been producing good returns for the past year. This month it posted better than 4%, recovering from a recent drawdown. It is ahead for the year by nearly 20%.
The Daily DowHedge gained nearly 10% in October, putting it in-line with the Weekly program, which gained 2%. Both are now ahead by more than 10% for the year. This program has contained the losses better than the other strategies and seems to be ready to make new highs.
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.
Gains of 5% and 3.5% for the smaller and larger Divergence portfolios in October. Year-to-date returns are good, higher by 8% and 14%. This program is much faster than the trend programs and offers good diversification.
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.
October added modest gains to the Timing program, leaving it higher by 42% and19% for the 10- and 20-stock portfolios. The program still has few positions while it waits for a combination of an oversold condition within an upwards trend. Still, it’s performance continues to be good.
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.”
Small losses in the Futures Trend program in October. But returns for all portfolios are still higher by more than 20% for the year. It is unusual for both equities and futures to be ahead in the same year. They seem to always alternate.
Group DF2: Daily Divergence Portfolio for Futures
Small gains for the Futures Divergence program in October, and year-to-date gains from 9% to 14%. This unusual performance pattern continues.
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.
TradeView Australia in November
Mr. Kaufman will now be doing a virtual seminar for TradeView in Melbourne. On-again, off-again Covid restrictions make it impossible to plan an in-person meeting. On the other hand, it will now be available to a much broader audience. It is schedule for about November 27, but check their website for exact times and speakers.
FinecoBank (Milan) in November
Mr. Kaufman will present twice for FinecoBank, Milan, in the last week of November. One presentation will be simultaneous translation (for Italian clients) and the other in the U.K. for their English customers. Check their website for exact dates and times.
MetaStock on November 15th
Mr Kaufman will give a 1-hour presentation at the MetaStock gala event on November 15th at 12pm Eastern time. Please join him.
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.
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