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Trading a Relentless Bull Market

Trading under conditions of a relentless bull market is hard. Here are some thoughts and how we deal with this problem.

Many active fund managers will not even come close to matching S&P 500 returns this year primarily due to the V-bottom in late December of last year after about a 20% decline, as shown in the chart below.

Year-to-date S&P 500 is up 20.8% but since the high of September 20, 2018, it is only gaining about 3.9%.

The high return year-to-date is result of a V-bottom pattern after a correction of 20% in 2018. Therefore, using the S&P 500 as a benchmark this year may lead to unfair comparisons but markets do not care much about fairness.

This may be a new market regime: a relentless bull market mixed with large corrections, volatility spikes and sharp recoveries. Many that relied on one strategy, for example trend-following, have been hit hard by this market. Technical analysts and especially chart pattern traders have been fooled several times. Some of those only serve as “useful idiots” for financial media sensational reports.

This is how we are trying to deal with this market in our premium signal service.

  • The strategies trade in weekly timeframe to stay under the radar as much as possible and avoid algo whipsaw.
  • We have a mix of strategies including equity long/short as a hedge.

Below is the list of strategies we use with year-to-date performance.

Strategy Strategy Type YTD (change for week)
SPYLMAW Long-only trend-following SPY +9.1% (+1.3%)
MRSPYW Long-only mean-reversion SPY +11.0% (+0.0%)
ETF2RW Long-only ETF rotation +11.0% (+0.1%)
ETF4RW Long-only ETF rotation +10.9% (+0.0%)
DOWW Dow stocks long/short +0.2% (-0.5%)
MRDOWW Long-only Dow stocks mean-reversion +5.0% (+0.4%)

Performance calculations are as of close of 10/25/2019.

Our average performance year-to-date for equal allocation is about 8%. Excluding the long/short, which is a hedge, average performance is 9.4%.

We are obviously not satisfied with the performance, however:

  • The strategies are conservative and employ bear market filters
  • No leverage is used

Below is an excerpt from this week’s commentary in market signals report.

We do not see many traders in Twitter bragging about their returns this year as in previous years. Some of those who concentrate exclusively on equity trend-following have been hit hard and returns year-to-date are below 5% after turning negative recently although S&P 500 total return is more than 20%. This was basically an effect of the V-bottom established near the end of last year and the subsequent rally. Quick reversals and volatility adversely affect trend-following strategies due to their inherent lag in responding to fast price action changes.

Equity long/.short is struggling this year but this strategy is essentially a hedge and it is not expected to perform well in market rallies. Mean-reversion in SPY and ETF rotation are gaining about 11% year-to-date and we consider this reasonable performance given the facts about price action.


Charting and backtesting program: Amibroker

Data provider: Norgate Data

Technical and quantitative analysis of major stock indexes and 34 popular ETFs are included in our Weekly Premium Reports. Market signals for position traders are offered by our premium Market Signals service

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