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Market Signals For July 8, 2024

Photo by Burak The Weekender

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

Contents

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

1. Performance of the ensemble and benchmarks

Weekly return of the ensemble: +1.4%

The equity of the equally-weighted strategy ensemble reached new highs this week.

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Year-to-date performance (Backtests, no leverage)

YTD Return YTD Maximum Drawdown
Strategy ensemble +9.8% -2.1%
Invesco RSP ETF +4.6% -6.0%
SPDR SPY ETF +17.4% -5.4%

On a risk-adjusted basis, the ensemble outperforms both the SPY ETF and its equal-weight counterpart, the RSP ETF. The ensemble also outperforms the latter on an absolute return basis due to deteriorating market breadth this year.

2. Market Recap and Comments (July 1–July 5, 2024)

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All assets gained in the holiday-shortened week except the US dollar (UUP), which fell 0.9%. Commodities (DBC) were up 2.4%, with gains in all sectors. Gold (GLD) was higher by 2.8%.

Large-cap stocks (SPY) added 1.9%, with breadth worsening and the equal-weighted S&P 500 index (RSP) falling 0.4%. International stocks (VEU) were up 2.2%. Fixed-income markets rebounded, with the TLT ETF gaining 1.2%.

Due to dovish comments made by central bank officials, expectations of lower rates and strong growth prospects drove the gains in stocks, bonds, and commodities. The US dollar fell accordingly.

Economists and stock market permabulls have been focusing on the economic variables that suit their thesis. Initially, they expected a quick convergence of inflation to 2% or even below. When that failed and inflation appeared to have stabilized at higher levels, they turned their attention to the labor market and the small rise in the unemployment rate, insisting that this is what the central bank is focusing on. In an election year, the central bank aligned with the permabull thesis. The contradiction lies in the fact that while economists and equity market forecasters who advocated for rates to remain higher for a longer period of time were correct, they have miscalculated the market’s direction. Meanwhile, those who have been wrong about inflation and rates thus far are claiming success due to the increase in equity prices.

Those with many years of experience in the market are familiar with these surreal aspects. However, in the current regime, things have gotten a bit extreme. Experienced traders know that trying to make sense of this game is a futile exercise. One way to deal with the contradictions and surreal aspects of markets is to use an ensemble of strategies that can offer reasonable risk-adjusted returns and some convexity in the event that the struggle intensifies and there is a “mean reversion to reality.” This is what we are trying to achieve with the ensemble of six strategies. We’re staying away from the guessing game and all its embarrassing aspects.

3. Positions and strategy performance: Friday, July 5, 2024

The sector and asset cross-sectional momentum strategies each gained 2.2% this week, while the Dow 30 long-short strategy was up 2.5%. The systematic asset allocation strategy gained 2.1%. The Dow 30 mean reversion strategy fell slightly but remains the most profitable strategy year-to-date.

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

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