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Market Signals For February 12, 2024

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Market recap, open positions, new signals, and performance of six trading strategies. Tactical asset allocation, mean-reversion, cross-sectional momentum, and equity long-short. Access the full report with a Market Signals or All-in-One subscription.

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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 (February 5–February 9, 2024)


This week, the strategy ensemble gained 0.3%, with cross-sectional asset and sector momentum and also Dow-30 mean-reversion strategies more than making up for the losses of Dow-30 long-short.

The bond market came under pressure due to supply concerns and entrenched inflation worries. The TLT ETF dropped 2.3%. The DBC ETF rose 2.2% on the back of a rally in energy and soft commodity prices. Gold (GLD) fell 0.5% for the week, and the US dollar (UUP) was up 0.2%

Large-cap stocks (SPY) were up 1.4% on the week, and international stocks (VEU) gained 0.9%. The equal-weight S&P 500 ETF (RSP) was up only 0.5% due to another rally in mega-cap stocks.

Since January 2022, the SPY ETF has been up 8.9%, but with a maximum drawdown of 24.5%.  Gold has outperformed large-cap stocks in the same period, with gains of 9.7%. Note that TLT is down 32.7% in the same period.

Due to deteriorating market breadth, there is speculation about a top formation in the US stock market. Although the risks have increased, breadth indicators are not very effective in timing market tops. Although the trade in mega-caps has gotten crowded, the market can remain in a crowded trade for longer than shorts can remain solvent. In addition, investors could miss a significant move by exiting early.

The alternatives to constantly trying to guess whether a market top is in place are known and limited: market timing, hedging, and diversification.  In our opinion, in markets with extended periods of irrational exuberance, hedging with options is too expensive due to “theta burn.” Solid diversification and market timing, especially when efficiently combined, can offer the potential to limit losses when a top is formed. The era of free money may be coming to an end, and investing in the market will become more challenging in the future. See this article for more details. 

2. Ensemble Performance 

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Charting and backtesting program: Amibroker. Data provider: Norgate Data

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