September 2022 Performance Report

Industry Benchmark Performance                                                                                            

Because of September ending on Friday, performance figures are not yet posted to Barclays. Early numbers show that Hedge Funds took a smaller loss than the broad market and show a smaller loss for the year. Futures are posting good gains again this month, which all approaches profitable. We are pleased to see that our Futures Trend program is still outperforming the Industry.

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 other recent publications and seminars at the end of this report. We post new interviews and reference new articles each month.

September Performance in Brief

Another good month for futures, now ahead by 40%, while we the Equity Trend program turn negative. As much as we want to always show profits, sometimes losing less than the broad market is as good as it gets.

On the other hand, the Timing program has been clever enough to remain out of the market. It entered and exited a few times in September, netting a small gain. It is now positive for the year and out of the market. Our two Divergence programs are not doing as well, but are still ahead of the broad market.

This is a difficult period for trading. Futures are able to take advantage of the big moves in interest rates, currencies, and the downside of equities. A stock program that is long can only focus on reducing risk.

Major Equity ETFs

It is not the picture anyone wants to see, but all the equity index ETFs are now below their value at the beginning of January 2021, going on two years. While Nasdaq is the weakest, all the indices are losing about the same and they have all broken below their lows in June. It is clear that we are now in a bear market.

CLOSE-UP: Going Green by Accident

Before the war in Ukraine, no one was rushing to save energy costs. While we know that fossil fuels are a problem, the only sign of advancement are the auto companies announcing that they will only produce electric cars by 2030, or is it 2035? California will stop selling gasoline engine cars after 2035. That’s 13 years from now. Anything can change before that. To be fair, we see more wind turbines and solar panels.

The reason for the sudden interest in alternative energy is the war in Ukraine. The flow of natural gas from Russia to Europe has essentially stopped. That will cause countries, and the people, to seek other sources of energy. For countries it will be nuclear, coal, and importing liquid natural gas (LNG). The most likely for individuals is solar and geothermal. Of course, there is a big movement towards electric cars.

Before we can draw conclusions, we need to ask, “Is this true?” and “Do stock prices reflect this change?” Even before that we need to understand the economics of alternative energy. All of the information below comes from Google searches. They seem reasonable, but one never knows.

Background

To understand what homeowners, car owners, and investors are doing, or plan to do, we need some background on their choices. Remember that investing in a company that makes batteries is not the same as investing in lithium. The value of a company depends on its management, business, and profitability. Lithium can be soaring and a company producing batteries can go out of business.

Solar Panels and Geothermal

The cost of installing solar panels for a 2,000 sf home is between $15,000 and $40,000 determined by how much energy you use. The negatives are the cost: weather reduces effectiveness, storing power is expensive, and some backup may be needed. Solar panels are estimated to last 25 years.

The two most interesting stocks for solar energy are FSLR (First Solar) and SPWR (Sun Power). Both have moved higher this year, but FSLR has dominated. But as inflation hits the consumer, all purchases decline. Chart 1 compares the stock prices of FSLR and SPWR with SPY for 2022.

Chart 1. Solar energy stocks.

A geothermal heat pump would cost $12,000 to $30,000 depending on the house size. Breakeven is 3-10 years, and they last 25-50 years. No backup is needed.

Although there are a number of companies specializing in geothermal systems, the only one listed was Ormat (ORA). Others were Eversource, Alterra, and Calpine. Eversource was too diversified to be comparable. Chart 2 shows the performance of ORA this year. Again, we see a rise in prices at the beginning of the summer, but not enough to be impressive, although better than the broad market index, SPY.

Chart 2. Prices of Ormat (ORA).

Electric Vehicles

Car manufacturers everywhere seem to be committing to the production of electric vehicles. As I said above, GM wants to be all electric by 2033 and California wants to ban new gasoline engine cars by 2035. Even Maserati has an electric car in the works.

Savings are not as obvious as they seem. Charging during the day can be as expensive as gasoline. If electricity costs ¢10.7 per kWh and the vehicle consumes 27 kWh to travel 100 miles, the cost per mile is about $0.03. If electricity costs ¢10.7 per kilowatt-hour, charging an EV with a 200-mile range (assuming a fully depleted 54 kWh battery) will cost about $6 to reach a full charge if done at home at night.

In general, it will cost between $10 and $30 to charge your EV while on the road, depending on what level of charger you are using. That makes the cost of an EV road trip comparable with that of the same journey in a regular (i.e., gas-powered) car. The cost of charging an electric car at a public charging station is between $0.40 and $0.70 per kWh, and you get around 3 to 4 miles for every kWh. The average EV vehicle could require around $30 to be fully charged. The time it takes to charge an electric car can be as little as 30 minutes or more than 12 hours. This depends on the size of the battery and the speed of the charging point. A typical electric car (60kWh battery) takes just under 8 hours to charge from empty-to-full with a 7kW charging point. EV drivers spend around 60% less on fuel than gas-burning vehicle drivers, according to a Consumer Reports Study. Over the average 200,000-mile lifespan of their vehicle, the total cost of a gas-powered car would be $94,540, while a similar EV would cost $90,160, according to CNBC.

Charts 3 and 4 show the stock LTHM (Livent) and the cash price of Lithium. Since 2019 the price of Lithium has increased by five times, while the price of LTHM has doubled. Prices of the commodity do not often translate 1:1 into corporate profits. As with all prices, as the cost of lithium increases, demand will fall.

Chart 3. Stock price of LTHM (Livent).

Chart 4. Lithium cash prices.

Electric Car Companies

We wanted to see how GM stock has performed given its announcement to go electric. It competes with Tesla. We also have NIO, an on-again, off-again company trying to associate with a larger manufacturer. Chart 5 (adjusted to 100 as of January 1) shows the prices of these three stocks this year. Tesla has been volatile but has held up better than its competitors. However, there will be more competition in the future.

Chart 5. Car companies electric or going electric.

The Future May Not Be As Kind

As of now, charging your EV at night saves money. But if everyone has an EV, then there might be more demand at night than during the day. That will cause prices to rise.

There is also the gas tax that States rely on for income. If you don’t use gas, the States will find another way to tax you. In Connecticut they do it on the value of the car. In other states they can do it on mileage (more difficult to verify). Whatever way they use to recover the lost income, it will end up costing us as much or more.  As of today, charging a car in the U.K. costs as much as gasoline.

As for solar panels and geothermal heating, as demand increases, so do costs. It will take longer to break even. But then you are doing a good thing for the environment. Only we won’t really know the amount of pollution from increased electricity production for a long time.

Wind turbines depends on wind. It is not always there.

Investing in Green Companies and ETFs

Chart 6 shows that investors had little interest in green companies before 2022. Chart 7 shows this year. The ETFs included are:

  • FAN (First Trust Global Wind Energy)
  • SMOG (VanEck Low Carbon Energy)
  • ERTH (MSCI Sustainable Future)
  • ICLN (iShares Global Clean Energy)
  • TAN (invesco Solar)

We all want a better Earth but are not willing to lose money in the process. However, times change. The war in Ukraine has moved energy to the front of our concerns. Still, not all stocks are good investments. As we saw earlier, investing in the commodity lithium has a far bigger return than in a company processing lithium or producing batteries. Investing in a company that provides an alternative energy option will depend on the way that company operates.

Chart 6. Green ETFs from 2009 compared to SPY.

Chart 7. Green ETFs in 2022.

Conclusion

The problem with investing is that we can see the need, but choosing a company is a different problem. A company can be poorly run, competition can be intense, and new technologies emerge.

For the EV space, investing in Lithium is a more likely solution that in a company that makes batteries. But then demand can also vary, so there will always be volatility.

Tesla has the largest share of the market but competition, whether better or not, will dilute their market share. And there seems to be a lot of competition coming soon.

Electricity is certainly going to be in demand, but electricity futures are complicated and not for the normal investor. Companies that provide electricity may be a good investment, provided that, like PG&E, they are not constantly in court defending why they shut down power in advance of a wildfire. We can skip Florida Power & Light until after the hurricane Ian clean-up. That leaves Consolidated Edison, which is also volatile.

This report leaves a lot of uncertainties, but that is the nature of the market. More knowledge makes better investing.

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.

A larger loss in September, but if it is any consolation, much smaller than the broad index markets. Our program has been reducing its exposure by trading fewer markets, but it is not able to avoid losses when it is long-only. We expect this program will be positioned well when the market finally turns around.

Income Focus and Sector Rotation

It looks like a small gain for the month, but it is the money market interest for being entirely in cash. That turns out to be the best strategy for this program in September. At some point interest rates will come down and we can our losses.

Sector Rotation

It’s too bad that this classic sector rotation program does not have interest rates as a sector, and can only go long. For now it is suffering along with the overall market.

DowHedge Programs

The Daily and Weekly DowHedge took the largest losses of our programs, now tracking the same pattern as the equity index markets. Picking the best of the Dow is not helping for now, and the “hedge” part of the program is activated on the return volatility of the program, which has not been triggered. It’s been a slow bleed rather than a plummet.

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.

Fairly modest losses for the Divergence program, although losses this year are nearly as much as the overall market. This program looks for pauses in the trend to enter for fast gains on the long side. Unfortunately, any long position is a problem for now.

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.

A small profit in Timing is a bright spot for the equity programs. The 10-stock portfolio jumped in and out of some positions for a few days, then exited completely. It retains a small profit for the year.

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.”

Futures gains 7% to 10% in September, bringing the year-to-date to 34% to 50%. This is clearly the place to be, although when the market turns it will give back some of these gains. Meanwhile, the dollar continues to gain, yields have risen, and equity markets keep  ratcheting down.

Group DF2: Daily Divergence Portfolio for Futures

Small gains of 1% to 2% are certainly better than the equity market, but this program still shows losses of the year.

Blogs and Recent Publications

Perry’s books are all available on Amazon or through our website, www.kaufmansignals.com.

October 2022

An interview with Perry was featured in the October anniversary issue of Technical Analysis of Stocks & Commodities. The interviewer is his wife, Barbara Diamond, giving a different perspective on his career.

September 2022

“The Real Risk of System Trading” can be found in the September issue of Technical Analysis of Stocks & Commodities. It summarizes the many way we can measure risk and suggests ways that will help you.

July 2022

The basis for this month’s Close-Up was posted on Seeking Alpha June 16. This month, Perry posted “3 Ways to Reduce Risk and 2 Ways to Increase Profits.”

June 2022

The July issue of Technical Analysis of Stocks & Commodities has Perry’s latest article, “Is It Too Volatile to Trade?” It is important to understand when the risk is greater than the reward.

Perry posted “How To Tell When the Bear Market Has Ended” on Seeking Alpha. You might find it useful if you are thinking about getting back in.

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 MoneyMentor.com.

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.

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.

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

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