The TGIF Effect

A few years ago, standard five-day workweek traditionalists were aghast when Forbes magazine published an article titled “Why Every Weekend Should Be A Three Day Weekend“. Based on data that we’ve been tracking for the last several years, Wall Street bulls appear to agree. Take a look at the following data which we updated from a 2014 presentation made to a Chicago-based hedge fund and covered in a recent blog. The table shows the simple sum of the gains for the S&P 500 on each day of the week:

Come Thursday afternoon, clearly Wall Street traders have their minds set (and Model Xs loaded up) for their weekend at the Hamptons. Maybe they’re thinking “I’m up so much already this week, let’s take the profits and head to the beach” or “the week is already down so much, I don’t want to lose anymore”. It’s also possible they simply don’t want to hold the risk over the weekend in fear of some market-crashing headline.

We were able to code this dynamic into our Adagio strategy last weekend and implement it on Thursday, liquidating our QQQ position just before the market close and avoiding the 2% decline in the Nasdaq on Friday. Our computer work showed that it was best to buy back on Friday close, so we did. The impact over the 10-year study was to improve the overall returns by 3%, reduce the drawdown by 50%, and reduce the exposure by 14%.

The table below summarizes our YTD results for 2021:

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

Limited Predictive Value

We noticed the VIX ETFs closed Friday at essentially the same levels as they were back in early December.  These are linked to time-decay of the underlying futures contract and, therefore, inherently decline over-time.  We had a theory that maybe the fact that they had not gone down even though the market has increased during this same time period may have some predictive value (maybe the divergent tension in the market will lead to a sell-off?).

We studied this pattern over prior timeframes going back five years – and reached the conclusion (so far) that there does not appear to be any useful correlation or predictive value.  So, we come back to our blog message from September 27, 2020 (excerpt below):

“We heard a podcast this week hosted by author Michael Covel that reminded us of some of the oldest and wisest perspectives provided by the then CEO of Exxon, Lee Raymond, when he was on CNBC in 1998 discussing the pending merger between Exxon and Mobil.  The commentator asked him what direction he thought oil prices were headed in the near-term.  He replied (paraphrased from memory) ‘We gave up trying to predict the direction of oil price moves a long time ago.  Instead, we have detailed strategies that if the price moves up to some extent, we execute Plan A, and if it goes down to some similar extent, we execute Plan B.’”

Regardless of new theories and (lack of) R&D findings, the recent market volatility reactively triggered the signals for both the VIXY and UVXY trades for the next market open so we will start next week with these hedging positions active (after the opening gap).

Strategy Updates

We will continue to evolve the weekly performance reporting of our blog as the data is available. For this week, we’ve created a table showing the YTD gains, max drawdowns and model correlation to the S&P 500.

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

Making Sense of the Nonsensical

Barry Gibb of the Bee Gees once said “all bubbles have a way of bursting or being deflated in the end”.  I suppose he would know.  With the Winklevoss twins crushing it with their beloved gravity-defying Bitcoin (BTC futures contract is up a whopping 673% since March 2020 lows) and the Nasdaq-100 index cresting an all-time high of 13,000 on Friday (NQ has doubled during that same period), what gives?  Add a Capitol Hill invasion, continued COVID uncertainty and mere days away from a new U.S. President at the helm and some would believe that we’re witnessing yet another cluster of financial bubbles irrationally and exuberantly inflating.  Is anyone concerned?  We certainly are not; we make every effort to avoid forming opinions about market direction, timing, etc.   Our trading models are designed to not only weather selloffs, but also profit by simply reacting to the data in either direction.

On January 1, we launched two additional strategies in Collective 2: Adagio and, as discussed in recent blogs, Maestro which combines three strategies (Forte, Adagio and buy-and-hold) and uses a proven periodic rebalancing approach.  We’re very excited about these new models which are pillars in our ever-growing portfolio of unique, math-driven investment strategies.

 Strategy Updates

We will continue to evolve the weekly performance reporting of our blog in the near future.  For now, here are the results for the first week of the year:

Maestro:         0.3% Loss

Adagio:           3.5% Gain

Forte:              1.4% Loss

S&P 500:         1.8% Gain

The VIXY and UVXY hedging trades were active over the past two weeks, doing a good job of positioning the account for an eventual sell-off and reading the reality of the real-world volatility – even though the bubble continued to inflate regardless of pandemics, social unrest, potential increases in taxation, over-valuations, etc.

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.

Launch of the Comprehensive Maestro Strategy

As mentioned in our recent blog posts, it’s time to launch our new Maestro Strategy that brings together the three key elements we wrote about last week:  a classic buy-n-hold approach, the slow-trading Adagio Strategy (as illustrated in the image below), and our existing Forte Strategy which has proven useful for hedging purposes and to intensify returns during periods of low volatility.

Adagio Strategy Sells on Increase Volatility and Buys Back as Volatility Starts to Decline

Our portfolio analysis has shown that an allocation of 40% to the buy-n-hold approach, 30% to the Adagio Strategy, and 30% to the Forte Strategy provides the optimal trade-off between gains, while keeping drawdowns to less than 15%.  For now, we’ll use the simple SPY S&P 500 tracking ETF for the buy-n-hold allocation and the QQQ Nasdaq-100 tracking ETF for the Adagio strategy.  The Forte Strategy will continue as is with the TQQQ 3X Nasdaq-100 tracking ETF and the VIX// UVXY volatility hedging ETFs.

The graph below shows the comparison between the S&P 500 and the new (theoretical) Maestro Strategy from January 1, 2018 through the end of 2020.

The following table and graphs compare the Maestro Strategy base case study period from January 2018 through August 2020 to the S&P 500 and the Maestro Strategy actual performance for an out-of-sample time period modeled since the end of the optimization studies in September 2020.

We’ll update and continue to evolve this reporting format on a weekly basis in 2021 to compare actual performance of the Maestro Strategy to both the original base case and the S&P 500.  We’ll also continue to report on the three separate strategies (Forte, Adagio, and Maestro) for comparison and track the results available on the Collective2 website for each of the strategies.

Forte Strategy Update

The Forte Strategy ended the year up 3.7% versus 16.3% for the S&P 500 while our drawdown was contained at 9.5% compared to 33.9% for the S&P 500.  The correlation to the general market remained low at 0.137.  We outlined several limitations with the Forte Strategy in our blog from last week and have set up two new C2 strategies (Adagio and Maestro) so subscribers can also have direct access to these strategies for linked accounts.  Admittingly, 2020 was a disappointing year.  We’ve learned from the last several months, gaining further insights, performing a wider spectrum of research and developing new methods as we’ve outlined.  We’re optimistic for 2021 and wish you and your families strong health and prosperity in the coming year.

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.