The weekly systematic trading reports include a market recap, open positions, new signals, and the performance of six trading strategies. Access to the report requires a Market Signals or All-in-One subscription.
Report Contents
1. Market Recap and Comments.
2. Ensemble Performance.
3. Positions and Performance of Strategies.
4. Signal Summary for Next Week.
1. Market Recap and Comments (July 24 – July 28, 2023)
Commodities (DBC) were up the most for the second week in a row due to gains in energy and base metals. The US dollar index (UUP) rebound continued as new data confirmed the resilience of the US economy and provided further support to forecasts of higher for longer interest rates. Large caps (SPY) and international stocks (VEU) gained. Longer duration bonds (TLT) were down the most.
Large caps (SPY) have gained 20.4% year-to-date after being down 18.2% last year. A loss of 18.2% requires a gain of 22.2% to recover, and as a result, the SPY ETF remains 2.1% below its all-time highs. Bonds (TLT) are down 38.3% from the all-time highs of August 2022, due to persisting inflationary pressures and higher rates.
Last week, I wrote:
Financial analysts have attributed the rebound in stocks to a resilient economy, but there is a weak link between equity prices and the performance of the economy. It is safer to attribute the equity rally to greed and FOMO.
This was a good week for the strategies, with the Dow 30 long-short based on DLPAL LS weekly features continuing to outperform. The strategy is up nearly 12% year-to-date after gaining 1.6% for the week.
Cross-sectional momentum is also behaving well this year and is the second-best-performing strategy. This week, the strategy gained 0.9%.
The weekly mean reversion with Dow 30 stocks was lucky due to a new long position in BA stock, which gained 12.5% from the open to the close of the week. The strategy gained 1.1% for the week.
Commodity ETF performance has been sluggish this year, but the strategy is there to provide convexity in case of a resurge in inflation.
This year’s worst performers have been the SPY ETF mean reversion, mainly due to a lack of signals, and the systematic allocation strategy, due to a slow response. Both strategies have made small gains year-to-date.
The main objective of these reports is to study the dynamics of strategy ensembles and how different market regimes affect signal generation and performance. We have noticed that discretionary traders usually take the opposite side of the signals these strategies generate.
For example, our commodity trend-following strategy has been short palladium (PALL) since the week ending January 27, 2023, and long sugar (CANE) since the week ending February 3, 2023. These two signals have been profitable, while discretionary traders appear to have taken the opposite side. We have also noticed that when the same strategy took a long position in gasoline (UGA) last week, some discretionary traders were shorting the commodity.
We believe that without a sound, systematic process, discretionary traders face high risks and quit. In our opinion, only systematic trading with well-defined entries and exits and, when required, the use of stops has a chance of providing a long-term positive expectation. However, many traders are in a hurry to make profits and are not disciplined enough to follow strategies. For those traders, the value of these reports could be in the direction of the signals generated for the various markets.
2. Ensemble Performance
Below is the weekly performance recap, including year-to-date performance and a comparison to the performance of the S&P 500, our PSI5TF futures trend-following strategy, and the DBMF ETF.
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Charting and backtesting program: Amibroker. Data provider: Norgate Data
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