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

Photo by Burak The Weekender

The weekly systematic trading updates include a market recap, open positions, new signals, and the performance of eight trading strategies. Access the full report with a Market Signals or All-in-One subscription.



Report Contents

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

1. Market Recap and Comments (December 5 – December 9, 2022)

Stocks fell after conflicting signals about the state of the economy and inflation. It was a bad week for mean-reversion and momentum. Bonds provided some hedge in the first four days of the week but then plunged on Friday. Commodities fell hard on Monday and then failed to rebound due to large losses in the energy sector.

The SPY ETF fell 3.3%. Commodities (DBC) plunged 4.7%. Gold (GLD) lost 0.1%. High-yield corporate bonds (HYG) were down 0.7%, while long-duration bonds (TLT) lost 0.7%. Year-to-date, the DBC ETF is up 15.1%. The TLT ETF is down the most, with a loss of 26.7%. The US Dollar Index (UUP) is up 10.7% year-to-date.

The S&P 500 index is down 18% from its all-time highs. The realized volatility, as measured by the 21-day annualized standard deviation of daily returns, was unchanged at 25.4%, but the implied volatility, as measured by VIX, rose from 19.1% to 22.8%. The risks in the equity markets remain high.

The DOWW long/short had solid gains for the third week in a row. The average loss of the five active strategies with positions was 1.6%.

Next week, equity exposure will be reduced slightly. The problem with no equity exposure, especially during historically good months such as December, is that staying out of the market may result in missing a large holiday or rebound rally. This is one of the conundrums investors face in addition to determining the proper level of risk.

Below is an excerpt from a report from two weeks ago:

The next month, December, is the strongest historically, with an average return of 1.72% since 1943. There have been a few outliers, such as the 2018 loss of 9.2%. A statistical analysis of December returns and an estimate of the probability of a gain next month are included in the premium article published yesterday.

So far, the SPY ETF is down 3.5% this month. Another down December is possible, but there is a hope that bonds will provide a hedge. Month-to-date, the TLT ETF is up 3.8%.

The year’s end is near, and systematic trading has struggled to minimize losses. One cause of the struggle was that commodities gave up a good fraction of their gains. In early June, the DBC ETF was up 47%, but it is now up only 15.1%. The losses in commodities and the relentless decline in bonds (TLT) have created a difficult environment. The lack of strong rebounds and the frequent down reversals have punished mean-reversion strategies.

Only the long-short strategies have been profitable this year and have provided convexity, but with high equity volatility. The primary theme this year has been “capital destruction.” Our ensemble of strategies has a large relative outperformance when compared to the S&P 500. For next year, we plan to introduce additional long-shot strategies for stocks, ETFs, and commodities.

2. Ensemble Performance

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