Are We Topping Out?

The last two months of the year are historically two of the most bullish.  However, in 2020, we’re already at toppy levels.  According to the chart below, the S&P 500 is only 2.3% from the all-time year-end two-month high of 13.57% set in 1954 which was during a multi-year period of economic prosperity:

With an increasing number of S&P 500 companies approaching previous, or establishing new, all-time highs while a significant percentage are suffering significant losses and laying off employees, valuations continue to get wildly high.  For example, The Walt Disney Company (NYSE: DIS) recently reported a quarterly loss of $710 million along with another 32,000 layoffs, yet the stock price is a mere 3% from it’s all-time high set a year ago.  Is a significant correction coming soon?  Who knows.  With proprietary trading desks, high-frequency traders and hedge funds increasingly dependent on volatility and panic selloffs to drive returns, it’s likely just a matter of time.  We also believe that a 10% correction at any given time for no particular reason is a common event in the stock market.

Forte Strategy Update

We executed two trades last week for a net loss of 0.3% compared to a gain of 2.3% by the S&P 500. Our YTD  results equal a 4.3% gain compared to a 12.6% gain for the S&P 500. Our YTD max drawdown is 9.5% versus 33.9% for the general market.    We continue to work on an overall portfolio approach to blend together a classic buy-and-hold strategy, our existing Forte strategy, and a new slow-trading Nasdaq strategy we’ve named Adagio.   We’ll launch this new strategy on the Collective2 website soon and provide more details on our portfolio research.

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.

Will the Market Give Thanks this Year?

While the month of November is the 2nd strongest month of the year (and this year the S&P 500 is already up over 8% so far this month), the week of Thanksgiving is particularly strong.   Over the past 68 years, the day before Thanksgiving and the day after Thanksgiving, combined have only been negative 17 times for a 75% success rate (although, in recent history, these two days have had a negative sum in all of the last three years).  

We don’t base trades on such historical findings given the relatively small sample size and generally feel that any kind of market prediction is sheer folly.  In contrast, all of our trading models are reactive in nature – responding to recent price moves and market volatility statistics.  Nonetheless, it’s noteworthy to share and more fodder for any cocktail conversations that may occur over the holiday weekend.

Anyway, regardless of the pandemic and any other headwinds you may face, we hope you enjoy the week of Thanksgiving with friends and family, reflect upon the first eleven months of the year and feel much gratitude.

Forte Strategy Update

We executed two trades last week for a net loss of 0.3% compared to a loss of 0.8% by the S&P 500. Our YTD  results equal a 4.6% gain compared to a 10.1% gain for the S&P 500. Our YTD max drawdown is 9.5% versus 33.9% for the general market.   The account correlation to the S&P 500 remains low at 0.137.  We continue to work on an overall portfolio approach to blend together a classic buy-and-hold strategy, our existing Forte strategy, and a new slow-trading Nasdaq strategy we’ve named Adagio.   We’ll launch this new strategy on the Collective2 website soon and provide more details on our portfolio research.

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.

Past, Present and…Futures

As MCR’s Forte, and soon-to-be-released Adagio, strategies continue to gain momentum, we will inevitably face challenges related to scalability.  There are several reasons the big players (e.g. hedge funds) typically trade futures contracts rather than exchange traded funds (ETFs) for index-centric strategies.  Here are some reasons why:

Tax advantage – Futures traders currently benefit from a more favorable tax treatment than equity traders under Section 1256 of the Internal Revenue Code (IRC) which states that futures contracts are taxed at a 60/40 split of long-term capital gains and short-term capital gains rates respectively—regardless of how long the position is held.  As long as financial industry lobbyists continue to dominate Washington to a hugely disproportionate degree, this will likely remain in place.

Relative volume consistency – Index futures trading volumes are generally more consistent month-to-month than ETFs (large professional speculators and “hedgers” are the biggest players in futures markets).  YTD 2020, the NQ futures contract (NASDAQ-100) average monthly volume variance was only 6% whereas the more panic-susceptible QQQ and TQQQ ETFs clocked in at variances north of 20% (March saw monthly volumes soar 223% on average; arbitrage traders likely exploited this).  More consistent volumes typically translate into more predictable order fills and less slippage.

Scalability – Index futures volumes are not only more consistent, they’re massive compared to ETFs.  The Chicago Mercantile Exchange’s (CME) E-Mini S&P 500 (ES) futures contract is one of the most heavily traded investment vehicles in the world (when factoring in leverage).  An investor trying to enter a $1M position for QQQ or TQQQ would represent as much as 3-5% of the first minute of opening trading activity whereas that same relative position could be entered with a mere 4 NQ contracts.  And what would those 4 contracts represent within the first minute of trading?  The trade size would equal 0.15% of the opening minute’s volume.  That’s the big leagues for you.

Direct correlation – The NQ futures contract is a direct derivative of the NASDAQ-100 Index whereas ETFs QQQ and TQQQ price values, while mostly correlated, do not directly equate to the underlying.  Although maybe less of a concern with higher volume ETFs, there will always be systemic risks (e.g. decay) when investing in long/short index ETFs (especially the leveraged ones).

24/7 (almost) – Most index futures contracts (e.g. ES, NQ, RTY, YM) open at 6pm EST on Sunday and close at 5pm EST on Friday (except for holidays).  Can’t sleep and want to go long the NASDAQ-100 at 2am on a Wednesday?  You certainly can…and the futures market will be liquid enough for most investors.  Although stocks and ETFs have pre- and post- market trading hours, they remain limited and bid/ask spreads are generally unfavorable.

We continue to research and model performance enhancement ideas including those related to futures.  Stay tuned.

Forte Strategy Update

No trades were executed last week as the volatility remained high blocking out new trades with the long equity ETFs while the upward market price moves precluded any VIX trades.   The SP500 gained 2.2% last week and is up 11.0% for the year compared to a gain of 5.3% by our Forte strategy.  While we have proven Forte’s ability to avoid and potentially profit during a declining market, we are doing extensive research to develop a new strategy (Adagio) that will trade with less frequency and be more effective in both avoiding a percentage of a major decline and capture more of the rebounding upside.   And as stated in prior blog emails, we are working on a portfolio approach to blend the strategies together (including a classic buy-n-hold approach) for optimal performance.

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.

Combining Strategies?

As we mentioned in our October 10 blog email (“Potential New Perspective“), we were contemplating the inclusion of a buy-and-hold strategy in our overall approach.  “We will have to pause and consider adding that dimension to our work as part of an investment portfolio. We acknowledge that as accounts become significantly large, the more frequent trading we currently use has limitations due to slippage, impacts from the current bid/ask price spread, etc. So, a strategy with a longer-term horizon and lower trading frequency may also make sense.”

The past 10 weeks have shown the potential benefit as the S&P 500 is exactly flat while the Forte strategy and a 50/50% Combined Strategy show gains of 2.4% and 1.5% respectively.   Perhaps more importantly is how this approach can minimize the emotional gyrations the market can induce; the Combined Strategy had the lowest volatility and drawdown compared to both the S&P 500 buy-and-hold and Forte strategies.   A summary of the performance metrics is shown below:

We used a simple 50/50 allocation for purposes of this blog email.  We’ll continue to research and look for other strategies and investment options, including futures contracts, to add to the mix and then optimize for the best performance in terms of gains, drawdowns, and volatility.

Forte Strategy Update

We executed one trade last week for a loss of 1.5% compared to a gain of 5.6% by the S&P 500. Our YTD results equal a 5.3% gain compared to a 8.6% YTD gain for the S&P 500. The account correlation to the general market dropped slightly and remains low at 0.137.

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.

Review of 3rd Generation Trading Models

The market action of the past two months reminds us of August 2019 when our Collective2 Forte Strategy suffered its worst month of returns along with the biggest drawdown.   When the month ended, we recorded a 10.8% loss with a 21.0% drawdown while the market only dropped a net of 1.7%.   The sell-off wasn’t that bad by historical comparisons, but the trade war news headlines and spurious presidential tweets created wild gyrations in the market which are known to cause trend-following trading systems to lose money.  

Reeling from the poor results, we paused trading activity and overhauled our model mechanics.  Several layers of volatility-based parameters were added and the settings were optimized over a 10-year lookback period.   Extensive portfolio analysis was performed to reduce the S&P 500 correlations and properly size the positions to help mitigate the chance for a drawdown greater than 15%.  We also limited the basket of securities to only include the major, high volume markets and the VIX index leveraged ETFs.

The new 3rd Generation models were implemented in early October 2019.    The results so far are encouraging with a gain of 18.3% and drawdown of 9.5% compared to the S&P 500 gain of 9.8% and drawdown of 33.9% during the same 13-month period.   We also went through a series of smaller-scale innovations over the past few months and continue to perform R&D work on an ongoing basis to further improve the results.

Forte Strategy Update

We executed 7 trades last week for a net gain of 4.5% compared to a loss of 5.6% by the S&P 500. Our YTD net results equal a 6.9% gain compared to a 1.2% YTD gain for the S&P 500. The account correlation to the general market dropped slightly and remains low at 0.144.

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.