2016 YTD Strategy Performance

2016 has been a very difficult year for money managers and investors alike. They had to withstand many shocks through the first half of the year, which resulted in elevated volatility environment.

Once the volatility subsided and the markets started rallying after the Brexit,  investors got all excited about prospects of the market. However, this joy was short-lived, as markets have not made any progress since mid-July. Sideways action of last 3+ months has been strenuous for market participants and financial media. Financial media has been coming up with new reasons for the market to move but every time market declines to show its hand in either direction (up or down). 

While markets were going sideways and had a very difficult year, our proprietary investment strategy has handsomely out-performed the market - by 14.3%.

SP500 Performance (Jan 1 - Oct 25) = 6.7%
Conservative Strategy (Jan 1 - Oct 25) = 21%

Cumulative performance since January in relation with SP500 (total returns) is shown below:

This out-performance is happening at a time when hedge fund, mutual fund and all other critical performance indices are poorly under-performing the market. 

Risk Management

Furthermore, the beauty of this portfolio is not only in its performance, its in the way it manages risk and generates Alpha. The portfolio, as of today, has a component weighted Beta of 0.37. In other words, it is almost totally uncorrelated with the market. Therefore, markets rise/decline will not impact the returns of this portfolio. This means that almost all the gains can be treated as Alpha, while Sharpe ratio is 1.7

Agility

Model is also agile enough to take advantage of trend changes and re-allocate prior to big market moves.

In short, this portfolio can help diversify your risk, amplify returns, protect gains and provide peace of mind, so that investors can focus on more important things like think about next big idea, theme or change.

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Strategy Performance

Our proprietary model has been performing very well so far this year. Even with recent 2.5 month sideways consolidation, model is up 22.1% vs 6.3% rise in SP500. We will continue to monitor the performance of this model and share updates. This model will be available for investors to replicate or invest in towards the end of the year.

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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:

Downtrend Continues

Market resumed its decline in a major way today. More interesting than the decline was the muted reaction from the traders, as VIX did not spike. If fear doesn't spike with declines, it means that we have further decline ahead.

Market rallied last week but got way over-bought in just few days. In fact, a sell signal was generated on Friday. That sell signal resulted in decline yesterday from which the market initially recovered. However, it was too much weight for the market to carry. As a result, it gave way to serious selling today.

We have been maintaining that the stock market's inherent structure changed last year in August, and suggested a move to cash. Proprietary portfolio allocation model allowed us to diversify between bonds and short stocks. This portfolio has been performing very well so far this year (link). It is up +6.7% this year, while SP500 is down 6.7% this year. We will talk about latest results in the next post. Right mow, let's look at the structure of the market.

Nasdaq along with many other indices, is tracing out another head and shoulders pattern. This pattern is larger in magnitude than the prior pattern, and could result in substantial decline.

Over the next few days, market will fill the right shoulder of this pattern. Once right shoulder is filled and market breaks below the neck-line, significant decline can be in the offering.

Head and Shoulders are reversal patterns, and when you see a cluster of these patterns, as shown above, they become even more important. Overall, it means that the trend of the last 7 years has ended and we have entered a bear market. This would mean that the economy will slow down and we might see additional bad news coming from different market segments. Oil was the initial catalyst but now we could see other areas hurting.

However, many people are just realizing this new development and others are still oblivious to a market decline. But we prepared for this potential scenario and now are waiting for the downtrend to unfold over the next few months. Bonds remain in a bull market, as yields continue to decline.