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Portfolio Trader started 6th of September 2011. With this post I want to share my performance review of the first  seven month. Typically seven month isn’t enough time to fully judge the performance of a trading system. However I feel ok sharing it now as we have been going through a few distinct market types (strong bull, sideways and high volatility).

A few facts upfront

• Results reported are 100% out-of-sample
• Every entry/exit has been published prior market open first trading day of the week.
• All trades are executed market-on-open.
• Results include a trading fee of 0.01$ / share.

Performance

Learning and improvements

A key benefit of Portfolio Trader is it’s continues development and innovation.  Let me share a few of these improvements I’ve made over the course of the past period:

• In Q4 / 2011 we saw some volatile weeks. The system changed position too quickly in such a volatile environment.
  => Now the ranking calculation is taking into account given market volatility.
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• Starting Portfolio Trader I had two systems trading stocks. One was trading mean-reversion and the other momentum.
  => Those are now combined into one system gradually switching between mean-reversion and momentum depending on the market condition.
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• Consistency vs.  high returns. A system developer has to make a number of crucial choices during the design process. In the past I’ve been focused too much on archiving high absolute returns.  For executing a system consistent steady profits are more important than absolute profits.
  => I’ve reviewed and adjusted my trading systems given that crucial learning.

Expectations

I’m ok with the performance of the past period. But way more important than performance is what I’ve learned and CHANGED. These changes should also positively impact the performance going forward. The most profitable trades occur at times when you don’t expect them. So building confidence in order to push the button when it’s needed (and most difficult) is a crucial element in order to succeed.

FREE trial

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Past weekly reports from 2012

• 2012 / 18
• 2012 / 17
• 2012 / 16
• 2012 / 15
• 2012 / 14
• 2012 / 13
• 2012 / 12
• 2012 / 11
• 2012 / 10
• 2012 / 09
• 2012 / 08
• 2012 / 07
• 2012 / 06
• 2012 / 05
• 2012 / 04
• 2012 / 03
• 2012 / 02
• 2012 / 01

List of all trades

• 2012
• 2011

Summary

Last week’s call worked out partially. We saw the expected weakness early in the week followed by two up-days. SPY finished the week with -0.64%.

For the coming week we’ve got a rather bullish setup. I do expect a positive week.

Price Action

[bullish]

• Direction: long term up, intermediate-term slightly positive
• Historical ranked volatility: long-term above 0.25 and bellow 0.50
• Trend-health: long-term trending environment (TSI >1.65) and intermediate trend conditions are above 25 and bellow 50.
• Channel: intermediate channel position within lower range.
• OB/OS: RSI(5)>25 and <50, RSI(10)>25 and <50, intermediate term time stretch in lower quartile.

Seasonality

[bullish]

Seasonality is bullish for April(K) and  week 16.

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Correlation

[bullish]

Correlation (M) among S&P500 members is increasing (>0.25 and <0.5) . Short-term we see a significant expansion (RSI3 of correlation>75)

Read more about  my correlation related research here.

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Breadth

[bullish]

Market Breadth (N) has weakened, but still up-trending.

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Sectors

[bearish]

Sector setup  (O)  is bearish. The sector leaders are XLI (Industrials) and XLF (Financials).

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Bonds

[positive]

RISK ON for the bond market (P). Generally this is positive for the stock market, especially with a combined setup (BONDS and DIRECTION).

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Summary

Last week’s call worked out only partially as we saw a minor dip though we stayed within my range of no more than 2%.

For this week we’ve got a mixed signal on the board. Due to last Friday’s non-farm payroll numbers futures are in the red. I do expect weakness to continue early in the week. Closing the week we will be flat.

Price Action

[bullish]

• Direction: long term up, intermediate-term up
• Historical ranked volatility: long-term bellow 0.50, intermediate-term between 0.50 and 0.75
• Trend-health: long-term trending environment (TSI >1.65) and intermediate trend conditions are very low and lower than 5 days ago.
• Channel: intermediate channel position very low
• OB/OS: RSI(5)>25 and <50, RSI(10)>25 and <50, intermediate term time stretch in lower quartile.

Seasonality

[mixed]

Seasonality is bullish for April(K), week 15 of the year is slightly bearish

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Correlation

[bullish]

Correlation (M) among S&P500 members is very low (<0.25) . Short-term we see a decrease in correlation  (RSI2<25).

Read more about  my correlation related research here.

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Breadth

[bullish]

Market Breadth (N) for top performers is at high absolute levels.

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Sectors

[bearish]

Sector setup  (O)  is bearish. The sector leaders are XLI (Industrials) and XLF (Financials).

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Bonds

[positive]

RISK ON for the bond market (P). Generally this is positive for the stock market, especially with a combined setup (BONDS and DIRECTION).

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Summary

Last week’s call worked out well: higher close with a mild pullback.

For next week we’ve got a mildly bullish signal. In case of a pull-back no more than 2%.

Price Action

[bullish]

• Direction: long term up, intermediate-term up
• Historical ranked volatility: 0.25 – 0.50, bellow mid-point
• Trend-health: long-term trending environment (TSI >1.65) and intermediate trend conditions are high, but lower than 5 days ago.
• Channel: intermediate channel position above mid-point.
• OB/OS: RSI(5)>50 and <75, RSI(10)>50 and <75, intermediate term time stretch in lower quartile.

.

Seasonality

[bullish]

Seasonality is bullish for April(K), especially during first week of April.

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Correlation

[bearish]

Correlation (M) among S&P500 members is higher (>0.25) . Short-term we see a decrease in correlation  (RSI2<50).

Read more about  my correlation related research here.

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Breadth

[bullish]

Market Breadth (N) for top performers is at high absolute levels and decreased over the week.

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Sectors

[bearish]

Sector setup  (O)  is bearish. The sector leaders are XLI (Industrials) and XLF (Financials).

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Bonds

[positive]

RISK ON for the bond market (P). Generally this is positive for the stock market, especially with a combined setup (BONDS and DIRECTION).

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Summary

Last week’s call worked out  almost as predicted: “sideways move with the low in the range of 1-2%”. We saw the low of the week bellow 1.18% of the opening. The week closed with a loss of -0.4%.

Setup for week 13 is  positive, hence I do expect a higher close. In case we see a pull-back it certainly won’t be a deep one (max 1.0 %)

Price Action

[bullish]

• Direction: long term up, intermediate-term up
• Historical volatility: long-term low,  short-term rising
• Trend-health: long-term trending environment (TSI >1.65) and intermediate trend conditions are high.
• Channel: intermediate channel position bellow mid-point.
• OB/OS: RSI(5)>50 and <75, RSI(10)>50 and <75, intermediate term time stretch bellow mid-point.

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Seasonality

[bullish]

Seasonality is bullish for March (K) as well as for week 12 of the year (L).

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Correlation

[neutral]

Correlation (M) among S&P500 members is higher (>0.25) . Short-term we continue to see a significant expansion (RSI2>95).

Read more about  my correlation related research here.

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Breadth

[neutral]

Market Breadth (N) for top performers is at high absolute levels and decreased over the week.

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Sectors

[bearish]

Sector setup  (O)  is bearish. The sector leaders are XLI (Industrials) and XLF (Financials).

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Bonds

[positive]

RISK ON for the bond market (P). Generally this is positive for the stock market, especially with a combined setup (BONDS and DIRECTION).

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Summary

Last week’s call worked out almost as predicted: a higher close, unfortunately we didn’t see the pull back of ~1% as expected.

Setup for week 12 is mixed with a slightly bullish bias. I do expect a sideways move with a low in the range of  1.0 – 2.0%.

Price Action

[bullish]

• Direction: long term up, intermediate-term up
• Volatility: long-term low,  short-term higher
• Trend-health: long-term trending environment (TSI >1.65) and intermediate trend conditions have weakened for twice over the last two weeks.
• Channel: intermediate channel position bellow mid-point.
• OB/OS: RSI(5)>80 and <95, RSI(10)>70 and <95

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Seasonality

[bullish]

Seasonality is bullish for March (K) as well as for week 12 of the year (L).

.

Correlation

[bearish]

Correlation (M) among S&P500 members is higher (>0.25) . Short-term we continue to see a significant expansion (RSI2>99).

Read more about  my correlation related research here.

.

Breadth

[bearish]

Market Breadth (N) for top performers is at high absolute levels and increased over the week, indicator value is at highest quartile. Intermediate-term trend of market breadth is weakening.

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Sectors

[bearish]

Sector setup  (O)  is bearish. The sector leaders are XLI (Industrials) and XLF (Financials).

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Bonds

[positive]

RISK ON for the bond market (P). Generally this is positive for the stock market, especially with a combined setup (BONDS and DIRECTION).

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Summary

For last week I’ve been neutral to slightly bearish as written (link) seven days ago. Until Tuesday the market showed a considerable pull-back (2.15%) . Though the week showed a gain of 0.19%.

Setup for week 11 is bullish, hence I expect a higher close for the week. Furthermore I’m expecting a mild pull-back in the range of ~ 1%.

Price Action

[bullish]

• Direction: long term up, intermediate-term up
• Volatility: low,  volatility expanding
• Trend-health: long-term trending environment (TSI >1.65) and intermediate trend conditions have weakened for twice over the last two weeks.
• Channel: intermediate channel position very low.
• OB/OS: RSI(5)>50 and <75, RSI(10)>50 and <75

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Seasonality

[bullish]

Seasonality is bullish for March (K) as well as for week 11 of the year (L).

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Correlation

[bearish]

Correlation (M) among S&P500 members remains low (<0.25) . Short-term we saw a significant expansion.

Read more about  my correlation related research here.

.

Breadth

[bullish]

Market Breadth (N) for top performers is at high absolute levels and decreased over the week, indicator value is at highest quartile. In the past this has been a highly positive setup.

.

Sectors

[bearish]

Sector setup  (O)  is bearish. The sector leaders are XLI (Industrials) and XLF (Financials).

.

Bonds

[positive]

RISK ON for the bond market (P). Generally this is positive for the stock market, especially with a combined setup of DIRECTION & VOLATILITY.

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Go here to read more about the popular TSI indicator.

Summary

Last week’s call worked out, again!  The market closed higher while we got a mild pull back of almost 1%, as written last week.

Setup for week 10 is neutral to slightly bearish, hence I expect a lower close. This call remains valid until Thursday. Friday’s non-farm payroll numbers can be game changing.

Want to have actionable trading ideas. Follow my trades with Portfolio Trader and click on the picture bellow.

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Price Action

[bullish]

• Direction: long term up, intermediate-term up
• Volatility: very low,  ranked long-term volatility bellow  intermediate term volatility
• Trend-health: long-term trending environment (TSI >1.65) and intermediate trend conditions have weakened.
• Channel: intermediate channel position very low.
• OB/OS: RSI(5)>50 and <75, RSI(10)>50 and <75

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Seasonality

[neutral]

Seasonality is bullish for March (K). First week of March is neutral (L).

.

Correlation

[neutral]

Correlation (M) among S&P500 members remains VERY low (<0.1) and continued to weaken.

Read more about  my correlation related research here.

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Breadth

[bearish]

Market Breadth (N) is at high absolute levels and continued to go-up, indicator value is at highest quartile. In the past this has been a highly negative setup.

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Sectors

[neutral]

No particular conclusion can be drawn from sector setup (O).

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Bonds

[positive]

RISK ON for the bond market (P). Generally this is positive for the stock market, especially with a combined setup of DIRECTION & VOLATILITY.

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With this post I want to share some very interesting research insight from the world of correlation.  Correlation metrics get a lot of attention during severe bear markets. That’s because most markets go down together, hence correlation is rising among the various markets and asset classes. Conventional market wisdom says: high correlation among markets and assets classes is a sign of fear.  But what about the opposite?  So I wanted to understand if conventional wisdom is right and what short-term impact correlation has on the US stock market and how to use this in my trading.

Background

• SPY is used as a proxy to trade the US stock market.
• Data is adjusted for cash dividends and splits
• Tests don’t consider trading cost / slippage
• History: January 1993 – February 2012

I calculated correlation among all SP500 members (survivorship bias free)  using daily bars. The calculation is conducted after the last trading day of the week has finished, that’s most likely Friday. The actual trade is taken the next day @OPEN, that’s most likely Monday. The trade is then held until next week (Monday). No other stops  or exists are used.

In the second column of each test you find a benchmark value. That is the strategy as described until here without any filter or market timing components. So we end up with almost 1000 trades, hence the benchmark strategy is 100% invested. The following columns show weekly returns (=weekly trades) under different correlation conditions.

Test 1: Looking at absolute correlation levels

The test is dividing the correlation measure into quartiles. We see very little difference among the first two buckets where the market is in 90+% of the time. Though high (peak ) correlation has a positive impact on next week’s performance.

Test 2: Higher or lower correlation

For this test we look into falling or rising correlation regardless of it’s absolute level. Friday’s level  compared to previous day (t-1) or five days ago (t-5).  There is a significant difference in performance and risk adjusted measures.

Weeks after falling correlation are way better than weeks after rising correlation!

Test 3: Using relative strength or weakness

In the final test we look at the RSI2 level of the average market correlation. RSI2 has the advantage that it’s less binary compared to looking at absolute changes to previous days. I think the results are outstanding! Being invested in weeks after RSI2 is bellow 25 delivered higher returns than the benchmark strategy while only being invested 38% of the time. Furthermore volatility is reduced significantly. The benchmark strategy had a max. drawdown of about 55% while the RSI2<25 strategy had  21% only.

A picture says more than thousands word

Now the pessimists among us might ask if this is time stable?

Let me know what YOU think about this test or how YOU use correlation in your trading.

This post is based on research that I’ve turned into an important component of my Portfolio Trader trading systems. Get a 30days trial of Portfolio Trader for free (here).

Should you be interested in a weekly correlation outlook ,then read my weekly 360° view here.

# Frank