Portfolio Performance Recap - Aug 26, 2016

Market continued its sideways action, without making any substantial break in either direction. August has been such a slow month that so far, with 3 trading days left in August, the gains have been 0.0% in SP500.

Now that Jackson Hole is out of the way, we should see some serious market action. However, given that we are approaching a holiday weekend, its likely to remain quite for another few days.

Although there are many thing to discuss, ranging from market turn window to synchronized movement across asset classes, and from mixed signals from sentiment indicators to Fed's interest rate decision, let's first review the performance of the proprietary model.

Following chart shows how the portfolio has performed in 2017 since the start of the year.

The portfolio is up 24% while SP500 is up 7.7%. Although the gains are very substantial i.e. +16.3% out-performance to SP500 after dividends, the best features are beyond numeric gains.

These gains were realized at a time when the global markets were in complete turmoil. First few months of the year saw the worst start to a year in the last century. at that time, everyone was concerned about Chinese hard landing, oil crash and Fed's increase in interest rates. But even during such times, persistent allocation of the portfolio resulted in amazing gains with very less volatility.

This portfolio has a current weighted Beta of 0.35, which means that its almost uncorrelated to the market. And therefore, these uncorrelated returns have a substantial component of Alpha.

Interesting Observations:

1. Back test data suggests that the maximum draw-down has been ~10%. So far the portfolio has declined around ~5% since the top. Therefore, downside is limited, until unless market dynamics totally change
2. portfolio has in-built risk-mitigation strategies. And therefore, its likely that the portfolio will readjust itself before the next significant move, so that it can benefit from market movement
3. SP500 has been flat YTD (0.0%), while portfolio has declined -2.4%. This shows that portfolio is risking much less to keep close to SP500 and will make-up the difference, as soon as the true direction of the market is revealed.
4. Aggressive portfolio is up ~44% in 2017. Although it has declined in August, it is now setting-up for a big break to the upside.

Lessons

1. Long-term gains require persistent strategy without portfolio moves
2. Short-term strategic positioning can help in improving Alpha and returns for investors
3. Market and financial media are best at confusing the majority of investors. For example, even when internals/fundamentals are strong, we will continue to see a lot of negativity from the market's so-called pundits
4. Worst decision one can make with his/her investment is to follow the pundits on a daily basis and make a decision based on their advise, which is based on day's/week's market action
5. One should always follow a proven thesis and rule of large numbers / probability will improve returns over time

MARKET CLASSIFICATION MODEL

A proprietary algorithm that classifies market conditions i.e. Bull market or Bear market. Currently, this model is suggesting a longer-term up-trend for the US Stock Market. For Subscription click below:

  

Gold Movement

Gold experienced a sharp decline today, while Gold Stocks were massacred with a 7% decline in one day. This kind of price action was very important to remove the excessive optimism that had plagued the Gold market.

Since early July, Gold has been consolidating sideways. Following chart shows a potential pattern being traced out by Gold.

Gold price action appears to be corrective in nature i.e. first decline was followed by a triangle formation. Triangle has recently broken to the downside. Minimum target of this pattern will be a decline below 1310. We think that over the next few days, gold will bottom around ~1300 and then it can resume its trend. This level signifinies Fibonacci ratios and support line.

This decline will also bring back the bears and force many weak longs to get out of the market, just before the next rally phase, according to Market Classification Model.

MARKET CLASSIFICATION MODEL

A proprietary algorithm that classifies market conditions i.e. Bull market or Bear market. Currently, this model is suggesting a longer-term up-trend for the US Stock Market. For Subscription click below:

Portfolio Performance - August 23, 2016

Last few weeks have been extremely slow for the market, and also for our proprietary portfolio. Following chart shows the performance of SP500 in relationship with our portfolio.

Some of the key observations are:

1. SP500 (total return) is up +0.62% MTD, while portfolio is down -0.5% for the same period
2. Model has been consolidating in a very tight range, which means a break is coming
3. SP500 is also stuck in a very tight range with a slight upwards tilt
4. Historically, model's performance has been uncorrelated to the market with upwards bias. If this continues, we should expect a break-out in the near future

Portfolio Overview
At a time when stock market has not performed well, and has caused a lot of anxiety among investors, our prop investing strategy has out performed the market in all aspects:

• Volatility - Historical testing shows that model has 8% standard deviation vs 16% for SP500
• Sharpe Ratio - Historically, model has a sharp ratio 2.5+
• Beta - Current weighted average Beta based on portfolio components is 0.32

And above all, model is positioned to take advantage of the next market move. Therefore, it enables one to relax and invest with confidence. 


Market Action and upcoming events
There are genuine reasons for current market calm e.g. August is a slow month and also people are awaiting Fed action. By some measures optimism among investors has reached levels where it has resulted in market declines. We think that market structure, IPM turn window and extreme in sentiments will give way to a sharper decline in the stock market after Labor day, once people return from vacation.

However, it won't be a reason to sell the market. The time to sell is now, if you want to. That will be time to buy because the trend remains up. Following the bull market is one of the most critical things an investor must do. Staying long in a bull market pays dividends in the long-term. At UST, we stay aligned with the trend by following our proprietary Market Classification Model

MARKET CLASSIFICATION MODEL

A proprietary algorithm that classifies market conditions i.e. Bull market or Bear market. Currently, this model is suggesting a longer-term up-trend for the US Stock Market. For Subscription click below:

Stock Market Structure

Stock Market and Bond market action suggests that both markets are consolidating. Once this consolidation is complete in the stock market, we should see a rally. 

We discussed about the potential of sideways market action and formation of a head and shoulders pattern on Aug 8th. As of Aug 21, market has traced out the right shoulder. 

Aug 8, 2016

Aug 21, 2016

Now that the right shoulder is almost complete, next step is to analyze the market structure to identify next steps. 

From an Elliott Wave perspective, market is currently in the last wave of the up-move. When we say last wave, it by no means mean that this will end the bull market. Instead, it just means that the current rally phase will give way to relatively large decline.

Recent market consolidation has helped in reducing market participants' optimism over the past few weeks, as evident from recent surveys. This will help in the next short-term rally phase. However, since the market is nearing the end of the larger rally phase which started with Brexit vote, we will see a resurgence of optimism and sharper decline.

In the above chart, a box is placed to show potential price and time range of market top based on Fibonacci relationship and IPM market timing analysis.

Overall market trend remains up. Even if the market declines, it will lead to higher prices till the time Market Classification Model is in Bull territory for the stock market.

                                                                                                                                              

MARKET CLASSIFICATION MODEL
A proprietary algorithm that classifies market conditions i.e. Bull market or Bear market. Currently, this model is suggesting a longer-term up-trend for the US Stock Market. In fact, this model is close to triggering another new Bull trigger.

Bond Market Update and Impact on Stocks -

A very quite week from all perspectives. Even with the Federal Reserves meeting minutes, the overall temp of the week remained slow. All of the major asset classes went sideways. SP500 was up +0.2%, while Bonds were down -0.5%. This kind of market action suggests that last week was very non-eventful and something big is coming-up in the near future.

We have already talked about the next stock market turn window - scheduled for around August 30th. Analysis suggests that the next turn would most likely be a near term top.

Therefore, with a turn window approaching and Jackson Hole summit scheduled for next week, there is a very good potential of market rallying next week.


Bond Market Bear Scenario

Typically if stocks rally, bonds decline. At the same time, bonds have other reasons for a decline. From a technical perspective, bond market is tracing out a bearish pattern. Following chart shows bonds consolidating in a triangular form, after July's sharp decline. Typically, this kind of consolidation is followed by a break in the prior direction.

Another reason to consider this scenario is that blue average can act as magnet on this decline. This decline will have deeper consequences for the entire market for the month of September. We will discuss these consequences in the next post.


Bond Market Bull Scenario

Just to provide a perspective on market action, good investors should also consider all the scenarios. From a bull perspective, market seems to be undergoing a sideways correction in a triangle form. This consolidation will result in an immediate break to the upside.

The problem with this scenario is that, this would mean stocks would go down. However, it seems unlikely because the Jackson Hole meeting and IPM turn window suggest a stock market rally.


Conclusion

A bond market decline and stock market rally makes the most sense. But please keep in mind that Bonds and stocks both are in bull markets, according to our proprietary Market Classification Model. MCM has kept us on the right side of the trade and has resulted in some amazing YTD results in 2016.

Subscription to MCM is open for investors (Services). 

Inflection Point Model - August Turn Date

Market's decline over the past few days probably culminated at today's Fed meetings minutes. Although there was nothing significant in the minutes, underlying uptrend of the stock market is taking the lead. 

There are several ways, technical and non-technical, in which one can justify either direction of the market i.e. up or down. But in any case, according to our proprietary market timing model, the next turn window is scheduled for Aug 30, 2016 (+/- 4 days).

Although the turn date signifies a major market inflection point with the direction, different market indicators suggest that current rally will continue till the end of August. End of August turn window will most likely be a short-term market top. 

This also means that next week's Federal Reserves Jackson Hole meeting would also propel the stock market. We will will discuss other indicators in the next posts. But the key thing to keep in mind is that no matter what anybody says about the market, the path of least resistance is always with the trend.

Currently, according to proprietary Market Classification Model, the stock market is in an uptrend. This model took us out of the stock market in September 2015 and kept us out of the stocks till June 2016. As a result, we avoided the sharp market gyrations, while investing in better performing areas. 

Market Update and Portfolio Performance

As markets wrap-up another quite week, there is a lot of discussion regarding the next steps of the market. Over the weekend, I have read several articles on the next steps of the market. There is an apparent disconnect between market observers. Some are calling for market to continue its rally, while others regard this market as being extremely over-valued. Few good articles in this regard have been pointed out by the following article (link): 

Main theme are related:

1. Bollinger Bands tightening
2. Financial sector break-out
3. Strength of the overall rally.

According to our proprietary model, stock market entered a new bull phase in July 2016. That was a time when the world was focused on the impact of Brexit. Brexit was supposed to bring the world economy to a halt, and would have shaved several percentage points from the global economy. Many people not only abstained from the market, they even totally exited the markets. Fast forward to today, and the markets are doing very well. SP500 total return index is up 4.32% since June 30th 2016. 

Prior to this correct call, our proprietary Market Classification Model rightly identified change in trend in September 2016. It kept us away from the treacherous markets of H1 2016, which allowed us to invest in other more prolific asset classes.

So far in 2016 (by the grace of God), our proprietary portfolio is performed extremely well with half the volatility risk and amazing Sharp Ratio. Furthermore, this portfolio is constructed in such a way that it minimize the Beta correlation with SP500. Current weighted asset Beta value is 0.35, which means that our model portfolio is nearly completely uncorrelated with the market. Therefore, one should not worry about market/economy risks.

Above chart shows the real-time performance of the model portfolio with real $. This performance is tracked at OpenFolio. The YTD performance values from the brokerage account is +27.6%

As we have mentioned before that we have also been testing an aggressive version of the investment model. We are humbled to share the YTD (7.5 months) results of this model - +57%.

Both of these results, by the grace of Almighty, are amazing and are achieved with minimal risk. In next couple of months, we will share original monthly statements from the brokerage account to share these results. Above all, we continue to enhance our strategies - Our motto is:

"Never Ending Search For Even Better Returns"

Although at this time we are not expecting any investments for these models (we are trying to make that a possibility at some time in future), if your interested, you can subscribe for "Market Classification Model" for now.

MARKET CLASSIFICATION MODEL
A proprietary algorithm that classifies market conditions i.e. Bull market or Bear market. Currently, this model is suggesting a longer-term up-trend for the US Stock Market.

Upcoming Market Opportunities

There are many areas where long-term investors can invest their savings in for long-term growth. However, not all of these areas generate substantial returns. 

For example, an investor who would have invested in Stocks in early 1990s and stayed in the market till 2000, would have gained a lot. On the other hand, if another investor would have invested in 2000, it would have taken him almost 12 years to break-even after the dot-com crash. 

Over the years, one of the most valuable lessons that I have learned in the markets is that don't lose money. It's a lesson touted by Warren Buffet and means a lot in investing. (10 best tips from Warren Buffet) 

"1. Never lose money
Warren Buffett's No. 1 piece of advice for 2016 is one he follows as closely as he can: "Rule No. 1: Never lose money. Rule No. 2: Never forget rule No. 1." This rule applies readily to investing -- if you're working from a loss, it's that much harder to get back to where you started, let alone earn gains."

STOCK MARKET
Now that we know that preserving capital is very important, growing it is the second most important thing. However, in order to grow capital risk would have to be taken. But risk has to be calculated. As for the risk in the market right now, Stocks are in a very good shape. In fact, they are poised for a substantial rally.
Now, markets don't go up in a straight line and there has been some froth built into the sentiment, which needs to be cleared-up before launching a new rally phase. But in any case, the longer-term (1-2 year) trajectory remains up.

Following chart shows the market's hypothetical map for 
the month of August.

Recent rally, which started last week, could continue for another 1-2 days. It will be followed by sideways market action, which could fill-in the head and shoulders pattern, followed by a September break-out to new highs.

                                                                                                                                              

MARKET CLASSIFICATION MODEL
A proprietary algorithm that classifies market conditions i.e. Bull market or Bear market. Currently, this model is suggesting a longer-term up-trend for the US Stock Market. In fact, this model is close to triggering another new Bull trigger. So far in 2016 (Jan-July), our two proprietary portfolios are up 27% (conservative) and 55% (aggressive) [performance]. One can subscribe to MCM using link above.

Performance - August 2, 2016