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Systematic Trading Update – September 12, 2022 [Premium Signals]

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

Report Contents

1. Market Recap and Comments.
2. Ensemble Performance.
3. Positions and Strategy Performance.
4. Signal Summary for Next Week.

1. Market Recap and Comments (September 6 – September 9, 2022)

After a three-week losing streak with a combined loss of 8.3%, stocks (SPY) rallied 3.5% in the holiday-shortened week. Commodities (DBC) recovered from earlier losses to end the week up 0.2%. Gold (GLD) gained 0.4%. High-yield corporate bonds (HYG) jumped 2%, but long-duration bonds (TLT) lost 1.7%. Year-to-date, DBC is up 22.2%. TLT is down the most, with a loss of 25.9%.

Mixed signals and complacency were the main drivers of the rally in stocks. Investors expect the best of all possible worlds: a dovish Fed, lower inflation, and no recession. A “U-shaped recovery” is the latest buzzword used by some analysts. The perception is that the worst is over. There are high expectations for a lower CPI number next week.

The best signals are delivered by the markets, and this week we noticed that despite the rally in stocks, long-duration bonds fell and yields rose. An engineered lower CPI through the release of strategic petroleum reserves may not be enough to cool inflationary pressures in the medium term. Historically, inflation is structural, sticky, and has large swings as the economy tries to find a new stable state.

Avoiding confirmation bias and wishful thinking that arise from the analysis of complex economic systems and the associated noise requires strategies. Although strategies are not a panacea and can fail, the process is not plagued by human biases.

Those who use narratives to justify their positions are gamblers. In markets, price discovery is the primary phenomenon, and everything else, including any economic analysis, is a secondary phenomenon plagued with noise. Strategies attempt to avoid the secondary phenomenon and approach price discovery systematically. Another approach is equity passive investing, which suffers from large drawdowns and long recovery periods.

There are no indications that any of the main drivers of the stock and bond market decline have been removed. The rally of this week may continue, and bonds at some point will bounce hard, but the medium-term direction of all assets is highly uncertain.

For more information on the strategies used in this report, click here. Premium content is 15% off for blog readers and Twitter followers with coupon code PAL15.

2. Ensemble Performance

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

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