Fundamentally Wrong Again

I was reminded again this week why I have spent so many hours developing computer math models to objectively execute trading plans with a goal of earning superior investment results over the long-run when BP (formerly British Petroleum) announced a 50% cut to its dividend. This move may not have been surprising to some, but this is a company I watched closely and had done a fair amount of corporate business with in prior roles. My experience in the oil & gas industry includes working in an oil refinery as a chemical engineer, forming diesel price hedging contracts, and sourcing a wide array of refinery and petrochemical products in prior corporate strategic sourcing positions. I had stated consistently in recent years that I thought the BP dividend was “safe” due to their close linkage to the British government and the reliance of British pensioners on the dividend payment. The theory is that the BP dividend was politically “too big to cut” and would somehow be propped up by profuse central bank money printing of the pound. I really had no firm basis for this opinion, but it sounded reasonable at the time and seemed to resonate with several that listened. This idea was proven wrong this week.

Secondly, conventional wisdom and standard college-level finance courses would say that when a company cuts its dividend, then the share price should go down given the expected future cash-flows are less – in this case, 50% less. Wrong again – after the announcement, the stock surged 7.5% the next day.

We can refer to Alan Greenspan’s “Irrational Exuberance” comments in December 1996 as another example of errant fundamental analysis. Back then, he was implying that the market was significantly overvalued by his indicators and the council of advisors. During the three years that followed, it became even more delusional by gaining 31% in 1997, 26% in 1998, and almost 20% in 1999 before the dot-com bubble burst in 2000. Even with the intellect and resources of Alan Greenspan, making investment decisions based on fundamental premises is a challenge.

We instead simply use price movements inputted into a math model framework as the basis for our trading decisions. One of the key goals is to eliminate the need to form an opinion and ignore influences from the media, financial reports and forecasts. We try to approach the markets with a “blank page” and simply focus on executing the trading models as precise as possible based on the math. In parallel, the R&D efforts continue to refine the math models and look for more consistent patterns and portfolio effects to minimize the drawdowns and variation in the returns. There is a certain calm confidence in this approach that provides an emotional center of stability that is important for successful traders.

Forte Strategy Update

We executed 10 trades this week using both the NASDAQ 3X leveraged ETF (TQQQ) and the 1.5X leveraged VIX index ETF (UVXY) for a net loss of 0.4% compared to a gain of 2.4% by the S&P 500. Our YTD net results are a 2.4% gain compared to a 3.7% YTD gain 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 0.154 – so essentially no correlation.

We successfully moved the Forte Strategy to the more robust TradeStation platform and fully enabled the auto-trading functionality needed to consistently execute the 15-min trading models.

Forte Futures Strategy Update

After three months of executing trades for our Forte Futures Strategy and achieving very respectable returns, we made the decision to close the strategy. Given that the Forte Futures strategy was mostly based on 2-minute charts and required fast execution scalping techniques, it was determined that the latency between TradeStation, Collective2 and subscriber Interactive Broker accounts was too significant given the ultra-short timeframes (versus 15-minute to daily charts used with the Forte Strategy). We will continue to research ways to integrate futures swing trading strategies into our flagship Forte Strategy. At some point down the road, we may also offer seminars or classes on how to successfully trade futures utilizing scalping techniques to achieve superior returns. Stay tuned!

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