Frustration Drives Innovation

There have been two bouts of significant trading performance frustration that has driven major breakthroughs in strategy and math models. First, in August of 2019 we suffered our worst month as the market gyrated up and down and we were caught in vicious whip-saws resulting in a 10.7% loss for the month and a 21.0% intraday peak-to-trough drawdown. When the volatility spiked, we kept on trading as usual leading to these poor numbers. This reality led to a lot of R&D effort in September and a new math model structure launched in early October that made volatility calculations a central component of entry and exit decisions. This worked well using daily interval data (meaning that the market closes, we run the math and make a decision to buy, sell, adjust a stop-loss or do nothing when the market opens tomorrow). The new approach generated a profit every month through January 2020 for a net gain of 12.4%. Then, the epic pandemic bear market of 2020 began. Once again, the volatility-centric models worked well only losing 2.1% in February and March versus 19.9% loss in the SP500 during these two months. We started the month of April quite pleased with our September 2019 R&D efforts based on these numbers and the decisive beat of the market indexes.

Then, the historic V-shape recovery began complete with high volatility which shut-down our daily models as it did in late February and March, so we have missed the 24.4% market gain in April through July. The missed opportunity was caused by the high volatility and the slow-roll of daily data to adjust.

As we covered last week, it is important to trade in multiple time-frames so we performed portfolio analysis to blend in a new model based on 15-min data that we had been working on for a number of months which updates data more quickly and has less sensitive volatility settings. This model worked well to both avoid the large sell-off and quickly capture the gains available starting in April (theoretically with retrospective analysis).

The other big frustration we’ve had is that we traded the volatility ETFs (UVXY and TVIX) extensively in 2018-19 up until September 2019 when we stopped in the aftermath of the August 2019 frustrations. These symbols likely would have performed well during the big sell-off as they were up over 950% during a five-week period starting in late February. (To greater clarity, 950% is not a typo – UVXY closed at 10.57 on February 12 and at 111.02 on March 18.) So, we have developed both daily and 15-min interval UVXY models to serve as a hedge for our predominate TQQQ long trades and hopefully generate profits during the next sell-off (which, regardless of the global central bankers, another sell-off will eventually emerge).

For transparency, we both have full-time corporate positions so we’ll employ professional traders and continue to work on greater automation to fully and consistently execute the 15-min models. So far, our execution of these 15-min models has been sporadic. We execute daily models overnight, so there is no complication with catching these trades; although the performance is not as strong as the 15-min models.

Forte Strategy Update

We executed eleven trades last week in our Forte (ETF) Strategy using the Nasdaq 3X leveraged ETF (TQQQ) and the 1.5X Leveraged VIX index ETF (UVXY) for a net gain of 1.0% compared to a loss of 0.3% by the S&P 500. Our YTD net results so far are a 0.6% loss compared to a 0.5% YTD loss for the S&P 500. Our YTD max drawdown is 9.5% vs 33.9% for the market and the correlation between the two data sets is 0.155 – so little to no correlation.

Forte Futures Update

In May, we made the decision to start a second strategy, Forte Futures, largely in an effort to diversify approaches. As mentioned above and in previous blogs, strategic use of multiple timeframes and symbols when trading can present more opportunities to profit especially given the unpredictable conditions in nearly every market. Like a pool shark studies the billiard table, playing out multiple scenarios in her/his head prior to making the shot, we study 2-, 5-, 15- and 60-minute charts across several futures contracts (both mini and micro) to find the highest probability trades. The result has been a 5.7% return since May inception and 4.1% in July with a 4.6% drawdown. Although we’re confident that we can sustain and even further improve the performance, it’s currently a manual process, so we continue to research and explore ways to automate. Stay tuned.

A Tale of Two Charts

Whether one has a positive or negative outlook depends largely on the individual’s perspective or vantage point. Turn on CNBC one moment and you may hear a strong bullish case for equities; an hour later you may listen to an analyst predicting an upcoming market apocalypse (e.g. NYU’s Nouriel Roubini). In the world of technical analysis, such variations in perspective can largely differ when viewing multiple timeframes. Trends and common indicators can look convincingly bullish on a daily chart while on a 15-minute (or any other) chart, a correction may be near. We’ll walk you through an example to demonstrate.

The following graph shows a daily chart of the gold futures contract. A quick observation tells us it’s currently in a bullish upward trajectory as it hovers above the 20-, 50-, and 200-day simple moving averages.

20200717_GC_daily

Investors should find comfort in continuing to hold long gold here, especially after recently cresting $1800 which was a significant psychological barrier going back to April. Even if there’s a pullback to $1700 (as long as the 200-day SMA holds as support), adding an additional position may prove to be prudent.

Contrast the daily view with a 15-minute chart of the exact same gold futures contract and you may have a different perspective.

20200717_GC_15min

A little over a week ago, gold spiked through $1800 and has bounced off of that support level over the last several days. Today’s session saw gold crawl back towards the $1820 resistance level that’s been in place since July 10. Depending on what gold decides to do when it reopens on the Chicago Mercantile Exchange on Sunday evening, it might make sense to go short with a stop loss above the $1820 level given the consolidation and indecision that’s been happening as of late.

So, is it the best of times or is it the worst of times? As a trader, it depends on the lens through which you gain your perspective…and the timeframe you choose to view.

Forte Strategy Update

We executed four trades last week in our Forte (ETF) Strategy – one using the Nasdaq 3X leveraged ETF (TQQQ) and three with the 1.5X Leveraged VIX index ETF (UVXY) for a net gain of 0.9% compared to a gain of 1.3% by the S&P 500. Our long Nasdaq model based on daily price data essentially shutdown for the week due to the high volatility as the markets butted against the psychological barrier we’ve mentioned in our prior email blogs. Our YTD net results so far are a 1.5% loss compared to a 1% YTD loss for the S&P 500. Our YTD max drawdown is 9.5% vs 33.9% for the S&P 500.

Our Forte Futures Strategy is up 2.5% for July and 4.1% since May inception.

More details about our trading activity can be found by registering on the Collective2 website and searching for “Forte Strategy” and “Forte Futures”. A running list of these email blogs and general information about Maestro Capital Research can be found at maestrocapitalresearch.com.

The Psychological Barrier Revisited

A couple of weeks ago, we wrote about psychological barriers in the markets and how a proverbial line-in-the-sand is currently serving as key support in the S&P 500. Understand that psychological levels are as timeless as the markets themselves. They’re also not limited to specific markets. Equities, precious metals, commodities and currencies all consistently bump against certain levels including round numbers, prior high/lows, moving averages, and Fibonacci ratio levels.

The question then is how should we position and profit based on these levels? We’ll discuss a few recent examples and how best to trade them.

The following graph shows a 15-minute chart of the Chicago Mercantile Exchange’s (CME) S&P 500 E-mini futures contract (ES) which is the largest and most actively-traded vehicle in the world (it’s what you see on the ticker when you flip on CNBC).

20200710_chart1_ES_15min

As you can see, the ES bounced off of the 3000 psychological support level at the end of June. As it zig-zagged downward towards that level from mid-June, a single contract long position at 3000 on June 28, with a stop loss order just below the June 14 low at around 2930 and a trailing profit target once it pushed above the 200-bar moving average (a risk/reward ratio of 70/117=0.6), would have yielded a $5712 profit.

20200710_chart1b_ES_15min

This next graph shows a 5-minute chart of the front-month crude oil (CL) contract.

20200710_chart2_CL_5min

The psychological level that the CL contract bounces off of here is 40 with a nice wide-range trajectory upwards. There were a few solid opportunities to go long with prior lows as stops and a top-range channel as profit targets. Keep in mind, the CL frequently behaves differently than the ES. Given the enormous amount of volume traded, the ES tends to trade in tighter channels and makes use of moving averages for profit targets, whereas the CL tends to trade better when playing the channels.

20200710_chart2b_CL_5min

Finally, this last graph provides several examples over the last couple of months trading a 60-minute gold (GC) chart.

20200710_chart3_GC_60min

Similar to crude oil, the GC contract faded downward until it hit a psychological level (in this case, 1700), then bounced upward towards the next rounded number level of 1800. Traders could have chosen to trade channels (similar to CL) or the 200-bar SMA (similar to ES); either would’ve worked well.

20200710_chart3b_GC_60min

Unlike the two previous charts, attempting to play the barriers resulted in a few losses. But as you can see, that was perfectly fine; other profitable opportunities unfolded. This highlights a critically important takeaway: never EVER enter into a position without clearly identifying a stop loss (especially when participating in the highly-leveraged futures markets). Many traders’ accounts have imploded as they wished positions to reverse in their favor only to continue trending against them. It’s best to take the loss that was acceptable upon initial entry and wait for the next opportunity (and trust us, there are endless opportunities to profit). Think about it…markets can trend aggressively because of traders with unwavering stubbornness who persistently fight against that trend. Their innate refusal to be wrong keeps them from flipping to the right side until a severe pain point is reached and forces a loss which in turn even further feeds the prevailing trend. It’s better to be solvent and, even better, profitable than to be right. After all, the trend is, without a doubt, always your friend!

Both MCR’s Forte Strategy and the new Forte Futures, available for subscription through Collective2, utilize the above psychological barrier approaches as part of an array of tactics to outperform the benchmark S&P 500 index.

Forte Strategy Update

We executed 15 trades last week using the Nasdaq 3X leveraged ETF (TQQQ) and a new model based on UVXY which is a 1.5X Leveraged ETF that mimics the VIX futures contract. We incurred a small net loss of 0.3% compared to a gain of 1.8% by the S&P 500. Our YTD net results so far equal a 2.4% loss compared to a 0.9% YTD loss for the S&P 500. Our YTD max drawdown is 9.5% compared to 33.9% for the S&P 500.

Forte Futures, which was introduced in May, is up 3.4% since inception.

More details about our trading activity can be found by registering on the Collective2 website and searching for “Forte Strategy” and “Forte Futures”. A running list of these email blogs and general information about Maestro Capital Research can be found at maestrocapitalresearch.com.

90 Days after the Massive Peak in Volatility

We hope the holiday weekend to celebrate our country’s independence finds you safe and with an opportunity to enjoy the festivities regardless of the challenging backdrop of current events. It’s been over 90 days since the market volatility peaked so we wanted to update the analysis and add in new thoughts and observations. Recall that we focused on market sell-off events that had a volatility spike that is 7X greater than the total average volatility of the Dow Jones 30 for a period from 1985 to the present pandemic. And that we used a simple definition of volatility as the 10-day moving average of the standard deviation of open-high-low-close prices divided by today’s closing price.

The volatility of today’s market is still elevated compared to historical averages and is in the same range as the two historic benchmarks at around 100 days after the peak.

20200704_image1

The significant difference is that the market returns after the COVID19 bear market are significantly higher than the market performance after Black Monday and the Financial Crisis.

20200704_image2

This is true for all three post-peak timeframes we covered so far – 30, 60, and 90 days after the peak.

20200704_image3

We think there is one obvious answer that explains this difference: The US Federal Reserve System and Bank. The list of Fed actions taken since the start of the pandemic is beyond the scope of this email blog. We’ll simply list the dates of formal announcements of specific policy developments aimed at supporting the financial markets to illustrate the degree of interventions: March 3, March 15, March 23, April 9, April 27, June 3 and June 29. Using the table above of comparable scale market sell-offs, the positive influence of the Fed actions is valued at net market gain of around 13%. With a US stock market capitalization of $38 Trillion (Dec 31, 2019) – this is approximately a $4.8T total market gain so far. We’ve made no attempt to quantify the cost of the Fed’s actions, but are willing to estimate it is significantly less than this amount, especially considering the money multiplier effects.

Lastly, you may have heard in various news commentaries – that the “Fed is out of bullets” – amusing that they only had one lever, interest rates. This is clearly not the case when reviewing the numerous actions taken over the past three months. It’s probably more accurate to say that they have a very large and creative array of policy tactics that can move the markets.

As we committed in a prior email blog, we continue to work on developing a mechanical trading system to take advantage of the next spike in volatility peak. The YTD Forte results show that we were successful in avoiding the big sell-off, but now, how can we capture the rapid recovery typically shown in the above table in future opportunities?

Forte Strategy Update

We executed five trades last week using the Nasdaq 3X leveraged ETF (TQQQ) for a net gain of 1.3% compared to a gain of 4.0% by the S&P 500. Our YTD net results so far equal a 2.1% loss compared to a 3.1% YTD loss for the S&P 500. Our YTD max drawdown is 9.5% compared to 33.9% for the SP 500. We also continue to build performance stats on our new Forte Futures strategy which went live two months ago.

More details about our trading activity can be found by registering on the Collective2 website and searching for Forte Strategy. A running list of these email blogs and general information about Maestro Capital Research can be found at maestrocapitalresearch.com.