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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. Access the full report with a Market Signals or All-in-One subscription.
Market Signals For September 23, 2024
Contents
1. Performance of the Ensemble and Benchmarks
2. 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: +0.6%
This week, the equity of the equally weighted strategy ensemble increased by 0.6%, reaching new highs for the year.
Year-to-date performance (Backtests, no leverage)
| YTD Return | YTD Maximum Drawdown | |
| Strategy ensemble | +13.8% | -2.5% |
| Invesco RSP ETF | +13.4% | -5.6% |
| SPDR SPY ETF | +20.7% | -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.
2. Recap and Comments (September 16–September 20, 2024)
All strategies gained this week, except for the Dow-30 long-short. The DMSR sector rotation strategy gained the most, +1.9%. The Dow-30 mean-reversion strategy’s weekly performance matched that of the S&P 500 index, up 1.4%, but with only three positions, thanks to a large gain in NKE. This is the best-performing strategy year-to-date with a gain of 26.3%.
The stock market gained due to a 50 basis point cut by the Fed, but the bond market declined, and gold also gained. Although these moves appear to contradict the need for a large rate cut, price action tends to defy linear thinking and simplistic rationalizations. The cross-section of a few economic indicators fails most of the time to explain price action due to the highly non-linear stochastic nature of the process.
Since we believe that it is highly unlikely that forecasts based on fundamentals generate a positive expectation over the long term, we rely on strategies. As we have noted several times in these reports, strategies do not guarantee success and can fail, but a suitably designed ensemble offers better odds of generating reasonable risk-adjusted returns over time before any leverage. Strategies must be simple to make sense, except for hedging, which often involves more.
3. Positions and strategy performance: Friday, September 20, 2024
| Strategy | Position | Ticker | YTD (change for the week) |
| TFD3M | Long | SPY, TLT | +16.2% (+0.2%) |
| MRSPYW | Long | SPY | +7.4% (+1.4%) |
| ETFNRW | Long | IAU, TLT, VTI | +12.4% (+0.6%) |
| DMSRM | Long | XLU, XLC, XLK, XLF | +15.7% (+1.9%) |
| DOWWN | Long Short | MCD, UNH, PG MRK, CSCO, AXP | +7.5% (-2.1%) |
| MRDOWW | Long | NKE, PG, UNH | +26.3% (+1.4%) |
4. Signal Summary for Next Week
All new signals are for the open of September 23, 2024.
| Strategy | Action | New Signals | Position size1 |
| TFD3M | SELL BUY | No action No action | 60%4 |
| MRSPYW | SELL BUY | SPY No action | 100% |
| ETFNRW | SELL BUY | No action No action | 33% |
| DMSRM | SELL BUY | No action No action | 25% |
| DOWWN | SELL COVER BUY SHORT | PG, UNH MRK, AXP MSFT, WMT AMZN, JNJ | 16.67%2 |
| MRDOWW | SELL BUY | NKE, PG WMT, V, JNJ, HON, VZ | 16.67%3 |
1 The position size applies to each signal or security based on the capital allocated to each strategy and may change depending on market conditions. For example, in the case of the MRDOWW strategy, each new position is sized based on 1/6 of the available closed equity at the time the signal is generated. For ETFNRW, each position is sized based on 1/3 of the available closed equity.
2 A 10% stop-loss is applied to each signal.
3 A 10% stop loss is applied to each signal. The stop-loss is optional and does not affect long-term performance. Applying the stop-loss is recommended, especially during high volatility periods.
4 The position size is 60% for SPY and 40% for TLT
New conflicting or overlapping signals or positions
DOWWN Long WMT – MRDOWW long WMT
DOWWN Sell PG – MRDOWW Sell PG
DOWWN Sell UNH – MRDOWW Open long UNH
DOWWN Short JNJ – MRDOWW Long JNJ
MRSPYW Sell SPY – TFD3M Open long SPY
Notes
- The Weekly Signals are updated during the weekend and before the market opens the following week. For more details and past performances, click here.
- It is not required to follow all strategies. For example, someone may be interested only in ETF rotation strategies and someone else in mean-reversion strategies. Others may only be interested in the Dow long/short strategy.
- The first time to consider the signals, the sell and cover signals are ignored because there are no open positions. Only new buys and/or shorts are taken into account. In the case of open positions, those may be considered depending on the strategy’s nature. For example, since tactical asset allocation and rotational strategies can stay in positions longer, their open positions may be considered. If the strategy uses a stop-loss, it is always calculated from the actual entry, not the original one. It is usually better to wait for new signals for shorter-term strategies, such as long/short or mean reversion.
- Relative performance depends on the date of the first buy and/or short signal. There is no robust way of choosing when to first consider the signals. Some traders wait for a drawdown before considering strategy signals, but this is risky because good performance can last longer. In the long term, the entry point is not important, but in the short term, variations can be large due to the timing of entry. Performance in these reports is based on entry signals from a long-term backtest.
- About conflicting signals: Suppose one follows the tactical asset allocation strategy and the mean-reversion strategy in SPY only, and the former strategy generates a buy signal while the latter generates a sell signal, both for the open of next week. These signals theoretically translate to no action. However, doing nothing assumes equal allocation to both strategies and the same equity levels. If the allocations and/or the equity levels are not the same, as is usually the case, net exposure must be increased or decreased accordingly after calculating the number of shares to buy and subtracting the number of shares to sell. For example, if one strategy must go long with 100 SPY shares but the other must sell 120 shares, then 20 SPY shares must be sold. Depending on volatility or some other metric, things become a bit more involved in the case of allocations. In general, trading a group of strategies that generate signals for the same securities requires doing some extra work on risk and money management. Reducing or increasing positions may be required when there are signals in the same securities.
- YTD performance results are based on backtests and include a $0.01 commission per share.
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Charting and backtesting program: Amibroker. Data provider: Norgate Data
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