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Systematic Trading Update – July 25, 2022 [Premium Signals]

The weekly systematic trading updates include open positions, new signals, and the performance of six trading strategies. A Market Signals or All in One subscription is required to access the report.

Update: In this report, we introduce the factor ETF long/short strategy, FACTLSW. This strategy will become part of the ensemble next year, but the signals will be provided starting with this report.

For more information on the strategies, click here. For All in One offers click here.

Market Recap and Comments (July 18 – July 22, 2022)

Stocks (SPY) ended the week with a 2.6% gain. Commodities (DBC) fell 0.7%. Gold (GLD) was up 1%. High Yield Corporate Bonds (HYG) gained 1.8%, while long-duration bonds (TLT) rallied 2.1%. Year-to-date, DBC is up 19.8%. TLT is down the most, with a loss of 19.2%.

Below is a weekly performance recap, including year-to-date performance and a comparison to popular benchmarks and the PSI5 mean-reversion strategy.

Average weekly performance of the five strategies (excluding long/short) +0.2%
Average YTD return including the long-short before the pause. -4.4%
Average YTD return excluding the long-short. -5.3%
Weekly change of S&P 500 index +2.5%
YTD return of the S&P 500 Index (no dividends) -16.9%
YTD return of 60/40 portfolio in SPY/AGG (annual rebalancing) -13.1%
YTD return of PSI5 mean-reversion algo (performance for SPY, QQQ, and IWM) -6.1%

The Dow 30 long-short strategy was paused on March 7, when the positions were closed due to the activation of a volatility switch. The performance of the strategy without the (optional) volatility switch is shown below.

Weekly performance of Dow 30 long-short strategy. +1.2%
YTD return of the Dow 30 long-short strategy. +3.3%
Average weekly performance of the six strategies (including long-short) +0.4%
Average YTD return including the long-short strategy -3.9%

Next week, the allocation to strategies will be at 22.2%. Three strategies are out of the market, and the long/short strategy is in (optional) pause mode due to high volatility.

Since June 17, or in the last 24 trading days, the S&P 500 has recovered 8%. This computes to a daily average of +0.33%, which is not spectacular and within two standard deviations of the 24-day average return. In other words, the rebound has been within normal bounds and translates to a pain bull trade after a prolonged pain bear trade.

Those who think they know the direction of the market in the next several weeks or months are in a delusional state of mind. No one does, and this market is becoming more sophisticated constantly, with complex products and derivatives available to participants. Relying on a robust ensemble of strategies can increase the probability of success, but it is far from sufficient; discipline is also important, and this market has done a lot of damage in this important domain, with many otherwise good traders abandoning strategies and turning to compulsive trading. Social media has contributed to these effects, and the damage will continue.

Comments about performance, positions, and the new signals report follow below.

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