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.
OCTOBER Performance in Brief
Another good month for all portfolios. The benchmark Daily Trend program has nearly caught up with SPY and the stock Divergence, daily DowHedge2, and Timing programs are slightly ahead of SPY.
Futures are better but not yet positive in all portfolios and the weekly Sector Rotation has been holding safe positions, which means that it hasn’t benefitted from the tech rally.
Still, all-in-all a good month.
Major Equity ETFs
Hard to believe with all the negative news, trade tariffs and the government shut-down, that the markets keep going up. This month it’s a rally in the tech stocks again. Given the size of those stocks, it can carry the whole index. But there is a lot of risk in that. A drawdown as we had in March become a real posibility.
CLOSE-UP: The Best Way to Hedge the U.S. Dollar
This review is an update on the article that I published in Seeking Alpha on October 24. I’ve included some portfolio allocations at the end to show that we can hedge the dollar and reduce volatility.
As we know, U.S. dollar has been falling. Gold and bitcoin have been rising. Which will protect the U.S. dollar in your portfolio? Or should it be something else? What about the U.S. dollar index, or just the Eurodollar or even the stock COIN or the S&P?
I’m going to look back only five years, which seems to capture the current market conditions, and because more recent volatility is important. The article in Seeking Alpha looked back seven years, but I think five years is a bit more responsive. Remember that markets can change, so you will need to keep your eyes on it.
All the data will be cash, the underlying data for futures, but not back-adjusted futures. The exception is COIN (the stock Coinbase) and SPY (the S&P ETF). I tried getting data for MSCI and BCI (both commodity indices) but with no luck. As it turns out, they have had a mild increase due to inflation, but nothing special.
The motivation for this article was whether gold or bitcoin is a better investment to hedge the dollar. I’ve included other markets because “we never know.” Perhaps you don’t need my analysis to make your decision, but there are a few points that you should consider.
- Gold collapsed after 1980 and it took 25 years before it moved up. It could decline again and stay down. Gold is not normally volatile, but the recent run-up makes it more vulnerable.
- Bitcoin has no intrinsic value. Its price is entirely based on demand, or lack of demand. It has been volatile.
- Which of the two will protect against losses in the U.S. dollar? Or, is something else better? Or, does it matter?
- Which offers the best diversification to an S&P portfolio?
- Is it better to trade the exchange, COIN, than bitcoin?
History of Gold Prices
I was trading in 1980 when gold peaked along with silver. It coincided with 18% interest rates, something I hope won’t happen again. It then languished for 30 years until just after the 2008 financial crisis. In Chart 1, it certainly looks different now.
Chart 1. Gold prices from 1978 through October 21, 2025. (Source: Commodity Systems Inc data)
Note that having reached nearly $2,000, it retracted to $1,000, a 50% decline. A reminder that nothing is without risk. After the current rally, a retracement could be large.
History of Bitcoin (BTC-USA) Prices
Realistically, bitcoin only goes back to 2017, giving us about 8 years of data. Bitcoin has always been volatile and not likely to change. Chart 2 shows both gold (on the right scale), and bitcoin (on the left scale). A first glance shows the remarkable return of bitcoin and the low volatility of gold.
Chart 2. Bitcoin (cash) and gold cash prices. (Source: Commodity Systems Inc data)
Hedging the U.S. Dollar
Gold has always been seen as a hedge against a declining U.S. dollar. Bitcoin originally advertised itself as a “currency,” but it’s not clear just what it is.
The dollar gains and loses based on the U.S. economy. When investors buy U.S. treasuries or buy U.S. stocks, they convert their currency to U.S. dollars. When we sell wheat or soybeans for export, we increase the value of the dollar.
The opposite can happen. If investors are not happy with U.S. policies, they abandon the dollar, they don’t buy U.S. grains they pull their investments out of the stock markets. The dollar declines. That has happened recently.
This is a good time to see whether gold, bitcoin, or some other market can offset the loss in the dollar. First, let’s look at the U.S. dollar index (DX), a composite of major currencies. When under 100, the dollar is weak. When above 100 it is strong. In general, the dollar has held in a neutral range but clearly weaker than it was in late 2022.
Chart 3. The dollar index cash prices (DX).
But perhaps looking only at the euro currency may be easier to see. The way the price is read is “how many USD per euro.” When the price rises, the dollar weakens. In Chart 4, the weakest U.S. dollar value was 125. It is now between 115 and 120, on the weaker side.
Chart 4. Euro-U.S. dollar cash prices. (Source: Data from Commodity Systems Inc)
The charts show that the dollar has been here before, but some investors want to protect against further losses. What is the best market?
Correlations
Correlations can tell you a lot. We calculate the daily returns of each cash price, then use the Excel function CORREL to create a cross-correlation table from 2019, shown in Chart 5. I’ve included COIN, the exchange that trades cryptocurrencies, and SPY, just in case!
Chart 5. Correlating Gold and Bitcoin with the Euro and the Dollar Index. (Source: Data from Commodity System, Inc).
We first want to look at what markets are negatively correlated to the dollar index. We see the Euro, but prices are the reverse of DX, so that doesn’t count. But gold and the dollar index have a negative correlation. When gold goes up, the dollar index drops. That’s what we were looking for.
On the other hand, bitcoin has the same relationship, but much weaker (-0.100 versus -0.346). In fact, we see that all of the markets are negatively correlated to DX. Note that, from a statistical viewpoint, small positive and negative correlations don’t mean much. The most important ones are gold-DX and gold-Euro. COIN vs SPY are positively correlated, no doubt because both have gone higher for different reasons.
Returns and Risk
Correlations are important, but we need to know about the returns and risk. Chart 6 shows both, plus the ratio of return to risk, which tells us which is the best payout. Bitcoin clearly has the best return, but at a risk that is most likely to wipe you out.
Chart 6. Annualized returns and annualized risk. (Source: Data from Commodity Systems Inc)
Gold turns out to be fairly stable, with the returns slightly better than the risk. Given that it is negatively correlated to the S&P, it is my choice for the best way to hedge the dollar. The other markets have very low returns; consequently a lower ratio.
Combining a portfolio of the S&P and gold seems ideal. But again, it is not without risk. Gold and the S&P can both decline at the same time, even if the long-term forecast looks promising. Given the choices, it is still the best.
Combining SPY and Gold
I’m going to use cash gold prices, but you can use an ETF that tracks physical gold. The most popular is IAU, but there are also SGOL, AAAU, and OUNZ. We’ll look at combining SPY and gold for the past 5 years, with allocations of SPY to gold of 50-50, 60-40, 70-30. 80-20, and 90-10 (SPY on the left, gold on the right).
Figure 7. Allocations of SPY and gold.
The 60-40 and 70-30 have the est ratio, but all combinations give about the same returns. As you reduce the allocation to gold, volatility (Risk) increases.
Gold is having its “moment.” Perhaps it’s 15 minutes in the sun. While I believe it has shown that it works for hedging the dollar and the S&P, I would keep allocations to 10% or 20%, rather than the 40% shown as the best. Regardless of your allocation, it will likely increase returns and reduce volatility.
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 fast rally in both daily and weekly Trend programs. The 10-stock portfolios higher by 11%. Rallies seem to be limited to tech stocks, but there are others doing as well. The next two months are uncertain with the government shut down. Let’s hope this doesn’t go into Christmas.
Income Focus and Sector Rotation
Fraction gains are a bit disappointing, but then the Fed has only been lowering the discount rate by ¼ point. There is a small upwards trend in performance. We’ll expect another ¼ cut next, but after that it’s uncertain.
Weekly Sector Rotation
One of the few markets that posted a loss in October. Given the erratic moves in the market, this program has opted for conservative ETFs. If we get a pullback in the index, this program will look good.
DowHedge Programs
The Daily DowHedge is well ahead of the Weekly program, showing that the market is changing quickly. The Daily DowHedge is higher by almost 5% in October, for a net gain of 20%, while the DOW index (DIA) is higher by 13%. So far, so good.
High-Risk Portfolios
An unusual month for a high-risk portfolio, with the 5-stock portfolio fractionally higher and the 10-stock portfolio up by 11%. We have to wonder whether 10 stocks gives better diversification, even though in the long-term, the smaller portfolio is far ahead. Something to think about.
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.
Modest gains of 2% and 3% put the year-to-date gains at 24% and 19%. Those are well above the long-term performance.
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.
It has all the indications of being a “run.” The 10-stock portfolio is higher by 3.7% for a total of 17.7%. The 20-stock portfolio is lagging with a gain of 1.4% and a year-to-date of 7.90. We’ll see if that can keep going.
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.
Gains of 3% to 7% with still some losses and profits for the year. Gold seems to be the best winner this year, but other markets are erratic. While the dollar is lower, it’s movement is small. Still, a rally is good.
Group DF2: Divergence Portfolio for Futures
Another mixed month but all portfolios still showing a loss for 2025. It’s a dilemma. A long period of good returns and a long period of poor returns. We’ll try to figure this one out.
Blogs and Recent Publications
Perry’s books are all available on Amazon or through our website, www.kaufmansignals.com.
October 2025
An article in Technical Analysis of Stocks & Commodities on “Low-Priced Stocks: A Golden Opportunity or an Unreasonable Risk.” You can take a guess or read the article!
As mentioned in the Close-Up, this was a follow-up on the article published in Seeking Alpha on October 25th, “How To Hedge the U.S. Dollar: Gold, Bitcoin, or Whatever?” This version included some portfolio allocations, which should help.
September 2025
No articles in September, although Perry has committed to being the Keynote Speaker at the Society of Technical Analysts (STA) when it hosts the IFTA conference in October 2026 (not this year!)
August 2025
The September issue of Technical Analysis of Stocks & Commodities has Perry’s article “Using the Elusive Volume Confirmation.” While volume has been an important component of price movement, Perry takes a look at how useful it has been.
July 2025
This month (the August issue) there is an article on “Explaining FX Carry (In Detail).” The Carry program has had years of profits followed by years of losses, yet it is a very important part of institutional trading. This article shows how it is actually done.
Perry has been asked to be the Keynote speaker at the IFTA Conference in London in 2026 (not this year!). Of course he will accept. Plan to be there!
June 2025
Yes, another article! “There is Money To Be Made On The Weekends – But You Need to Know The Market,” appeared in the June issue of Technical Analysis of Stocks & Commodities.
Perry gave a Webinar to “Trading Heads” in Mumbai, India on June 5 at 9:30 AM New York time. Discussed “Not the Usual Diversification.” With any luck, it was taped.
May 2025
You’ll find Perry’s article “Trading the Channel” more interesting than usual. Published in the May issue of Technical Analysis of Stocks & Commodities, it looks at various ways of construction a channel, and one very profitable one.
Perry also addressed a Spanish class where they are building algorithmic strategies. Called ROBOTRADER, it in ETSIT-UPM (Escuela Técnica Superior Ingenieros Telecomunicación- Universidad Politécnica Madrid). The presentation is about Diversfication (in English) and available on youtube.
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 the Society 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.
Older Items of Interest
Perry did a studio interview with Jeff Baccaccio (“Rfactory”) in London in March 2025. 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
Perry was interviewed on June 27, 2024 by Simon Mansell and Richard Brennan at QuantiveAlpha (Queensland, Australia), a website heavy into technical trading. It appears on their website.
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.
© October 2025, Etna Publishing, LLC. All Rights Reserved.