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Systematic Trading Update – December 19, 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 12 – December 16, 2022)

Stocks fell for a second week in a row after the rate decision and comments by the Fed Chairman. Investors are realizing the fight against inflation may take longer than expected by optimist analysts.

The SPY ETF fell 2.1%. Commodities (DBC) gained 1% after the heavy losses of the previous week. Gold (GLD) gave up initial gains to close down 0.2%, as the path to lower rates appears to be longer than expected. High-yield corporate bonds (HYG) were down 0.1%, while long-duration bonds (TLT) gained 1%. Year-to-date, the DBC ETF is up 16.3%. The TLT ETF is down the most, with a loss of 26%. The US Dollar Index (UUP) is up 10.5% year-to-date.

The S&P 500 index is down 19.7% from its all-time highs. The realized volatility, as measured by the 21-day annualized standard deviation of daily returns, fell to 19.3% from 25.4%, and the implied volatility, as measured by VIX, also fell from 22.8% to 22.6. The risks in the equity markets remain high, as noted in the previous report. The fall in volatility was due to the rally on Monday, December 12, 2022. Then, the volatility rebounded but, possibly, due to options expiration, it remained subdued.

The main theme in the markets was once again “capital destruction”. The bounce nearly everyone was expecting due to the decision to hike rates by 50 basis points instead of 75 did not come. Instead, the market was hit by waves of selling. If the stock market rout continues to new lows, this will be the third bull trap for the year with significant losses for passive, 60/40, price series momentum, and mean-reversion traders.

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