Stock Market Systems: Reiterate Buy (8/17/12)

It's been a while since our last update from our Stock Market Systems on July 12, 2012 -- so we wanted to re-iterate our systems' Buy signals.  As our readers know, we update the blog whenever there is a change to our main stock market signals (Long-Term or Intermediate-Term Models).  In this case, our signals remain the same -- but we just wanted to check in and re-iterate the Buy signals.

On July 12, the S&P stood at 1336.8.  Our models kept us generally long -- and today, the S&P closed at 1415.5, reaching recent highs.  Our models remain long -- and we will make a blog post on a material change to our models' signals.

In the futures markets, after gains over the last few months, several markets have been in a consolidation phase (such as currencies, precious metals).  Grains have been choppy, although generally higher due to this year's drought.

Commodities: Dry Weather Pushes Grains Higher

Dry weather in the US Midwest, over an extended period, has turned what some predicted to be a bumper crop -- into a potential disaster for this year's crops.  Corn, in particular, has been in the news, with recent prices soaring above $7.00 per bushel, from a recent price in the $5.50 range.

It is noteworthy that corn started the year in the $6.20 to $6.80 range, but weather forecasts, the shaky economy -- and other predictions (of a bumper crop) -- caused choppy price action down to the $5.50 level.  Today, corn surpassed the $7.00 level -- and all eyes are on Mother Nature -- and the weather.  One expert calls for some potential relief over the weekend, albeit -- not much -- before more oppressive heat (and dry weather) continues in the near-term afterwards.  

Some farmers are comparing the weather and crop conditions to the 1988 drought, while others are even bringing up the 1930's Dust Bowl scenario.  On the other hand, some say it is too early -- and that the situation is fluid (no pun intended) -- and that we will only know after "pollination," at the end of the summer.

A spike in food prices -- and a potential blip in (food) inflation will not be good news for an already shaky economy.  On the other hand, managed futures traders have been caught in choppy market action for quite a while, so sustained trends will be a positive for futures traders.


Please read more here:
http://www.nytimes.com/2012/07/05/us/for-midwest-corn-crop-the-pressure-rises-like-the-heat.html?_r=1

http://www.cnbc.com/id/48058304

Alternatives in the News

How Managed Futures Fit into Your Portfolio

In a nutshell, what managed futures provide is an important non-correlated asset that any serious investor should have in their portfolio. Statistical studies—academic studies—suggest that that should be anywhere from 5% to 15% of a portfolio.

Some people say, “Well, it should be held for three to five years.” I would posit that it should be held as long as you own equities and/or fixed income in a portfolio, because of the diversification effects.

What we’re trying to do is to provide some stability. One of my colleagues likes to suggest that it’s the seatbelt in the portfolio. You get into a car, you’re in a high-performance car, you still want to put a seatbelt on in case there’s an accident.

Read more here:

http://www.forbes.com/sites/katestalter/2012/01/17/how-managed-futures-fit-into-your-portfolio/3/

Bruising Year for Commodities Hedge Funds

The drop came as multibillion-dollar commodities hedge funds such as Blenheim, Clive Capital, BlueGold and Merchant posted double-digit losses for the year.

Some of the industry’s best-known managers were hardest hit. Blenheim, which has $5bn in assets, posted a loss of about 17 per cent, according to three investors. The fund, founded in 1988 by trader Willem Kooyker, suffered its worst month since inception in September, weighed down by bets on corn and aluminium, an investor said.

(May need free registration at FT.com)

http://www.ft.com/cms/s/0/9179ec9a-4c2f-11e1-bd09-00144feabdc0.html#ixzz1lLDjfXjv

Interview with Carlton Chin of CARAT / Adamah Capital

I truly believe that the best way to enhance diversification is through managed futures. A lot of hedge funds will use the same basic building blocks - using stocks and bonds - while managed futures uses everything from currencies to commodities. That really adds diversity to a portfolio.

...

I love to look, especially for hedge funds and managed futures, at downside volatility. We can look at the standard deviation of the S&P 500, which over the past 30-plus years is 15.6 percent. Interestingly, if you look at the downside volatility, that is 11.7 percent. So the scary, or downside volatility, represents 75 percent of the overall volatility. This is one place where managed futures shines because based on a series of returns, mostly the BarclayHedge CTA Index but also my performance, the volatility has been 17 percent in total. The standard deviation is about 17 percent which is a little higher than the S&P 500 but if you look at just the downside volatility, when the performance for managed futures was negative, that number is just 10.1 percent.

...

I’ve been lucky to work with some folks at the University of Chicago -- and Frank Vannerson was from Princeton. These academic studies can add credibility as well, and show that managed futures/alternative investments have benefits.

...

Carlton Chin is chief investment officer and head of research at CARAT/Adamah Capital LLC, a fund manager and CTA focused on systematic managed futures strategies. An investment professional since 1990, he spoke with Managed Futures Newsletter editor Jim Kharouf about his start in the business, whether markets change and how he looks at volatility.

Read more here:

http://www.jlnmanagedfutures.com/2012/02/five-minutes-with-carlton-chin.html

Managed Futures & Commodities: Overview & 2012 Outlook

Below is an excerpt from an article by Carlton Chin on Managed Futures, Commodities and corresponding indices, including a Liquid Commodities Index and an Investable Managed Futures Index -- as well as Barclays & NewEdge Indices: 

The performance of the Managed Futures industry and CTAs (Commodity Trading Advisors) is generally uncorrelated to the stock market and other hedge fund strategies. The year 2011 has seen most CTAs flat- to-slightly down, along with most other investment strategies and asset classes.

Here is a sampling of several Managed Futures industry benchmarks through the end of November:

• Barclays CTA Index -3.1%
• Barclays BTOP 50 Index -4.0%
• NewEdge CTA Index -4.7%
• NewEdge Trend Sub Index -8.4%
• Investable Managed Futures Index 0.0%

Although CTAs would have loved to achieve positive returns this year – to further its diversification arguments – the Managed Futures industry has already proven its diversification mettle in 2008, when CTAs produced double-digit returns during the start of the financial meltdown. In particular, the Barclays CTA Index was up 14.1% and the Investable Managed Futures Index was up 25.5% in 2008, when the S&P 500 was down -37.0%.


AN INVESTMENT IN FUTURES CAN RESULT IN LOSSES.
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.

Managed Futures and S&P 500 Annual Performance

Notes:

• Annual returns for S&P 500 and Investable Managed Futures Index.
• 2011 Returns are year-to-date as of November 30, 2011.

The author, Carlton Chin, CFA (CTA and portfolio manager at Adamah Capital) is a specialist in systematic and quantitative investment strategies as well as dynamic asset allocation.  He believes that alternative assets can help diversify traditional portfolios of stocks & bonds -- and improve risk-adjusted returns. 

Read more here:

http://seekingalpha.com/article/312307-managed-futures-and-commodities-overview-and-outlook-for-2012




Carlton Chin, CFA, is the portfolio manager for ADAMAH Capital, which specializes in Computer Aided Research & Advanced Technology (CARAT). He is a specialist in quantitative investment strategies, managed futures, alternative assets, global macro & strategic asset allocation. Carlton combines a CTA hedge fund background with portfolio optimization work for institutional investors. He founded Adamah with his long-time friend and associate, George Parr. Carlton has been quoted and featured in the Wall St. Journal, NY Times, MARhedge, Futures Magazine, and Financial Trader. He holds both undergraduate and graduate degrees from MIT.

Article on Portfolio Optimization & Alternative Assets

Here's an article one of our contributors wrote on asset allocation, alternative investments, and ETFs.

The benefits of portfolio optimization and Modern Portfolio Theory are well-documented. In this article, we review a well-balanced portfolio and several low-fee ETFs that can be used to implement the asset mix.

Of particular interest, the portfolio mix includes an ETF allocation specializing in an “alternative investment” strategy. Alternative investment strategies such as “managed futures” are gaining in popularity because they offer increased diversification benefits – due to lower correlations – versus traditional assets such as stocks and bonds.

Please read more here:

http://seekingalpha.com/article/277851-a-well-balanced-portfolio-including-alternative-investment-etf-allocation

March Recap 4/5/11

As usual, the financial markets were very interesting.  The month of March saw extreme volatility -- and weirdly enough, some markets remained relatively flat for the month.  U.S. stocks and bonds ended the month mostly flat, with the S&P 500 closing at 1326 after opening the month at 1327.

Events in Japan and Libya created extreme volatility and whipsaw-like market action for many markets.  The Japanese Nikkei index plummeted -20% before bouncing back to end the month down about -10%.  Many other markets such as sugar, oil, and grains also saw reversals in long-term trends and then a bounce-back.

Managed futures indices and benchmarks tabulated by Barclays and NewEdge were down about -2% to -5%.  Trading advisor performance was generally down, with performance in a wide range.  In general, the commodities sectors fared better than the financial sectors.

Anatomy of a Trade

I was talking to some friends and associates recently about market action and the "setup of a trade."  If you are interested in trading systems, below are some notes from our conversations.

By way of background, our quantitative trading systems are technical in nature and are tuned and researched for market action, time-frame, and execution.  We focus on the intermediate to long-term time horizon -- with shorter-term approaches "in the mix" for diversification and risk management reasons.

In particular, the notes focus on trade entry and execution.  We would all like to enter a trade at the best possible price/trade entry.  On the other hand, we have heard some great traders and "market wizards" such as Paul Tudor Jones, Bill Eckhardt, or Richard Dennis -- say they prefer trades and markets where execution seems bad; or markets that are "running away" from them.

In the long run (based on experience; also, data backs this up) -- our trading strategies are designed so that they can enter trades "at the market."  Sometimes, we'll be able to get a better price; other times, the trade will move away from us (along with profits) -- so going "at the market" is okay.  If we want to "be long" in a market, we should initiate the trade.    

Below is an example of why some market wizards PREFER buying markets that are running away from them. 

_____ 

Say, we want to buy Market X and the price is 100.00.

• (A) Trade Initiation -- at trade initiation, our trade expectations might be something like this.  
• 47% chance of Profitable Trade (yes, less than 1/2 the trades are profitable...)
• Avg Gain = 1700 (but avg gain is greater than avg loss); 
• Avg Loss = 1000
• In the long run, this kind of trade action will lead to profits, even with less than 50% of the trades profitable.
• (B) "Bargain" (?!) Trade -- if we wait a bit on pricing -- and the price is now 99.25, we might think, "Oh great, this is a good deal."  However, note that this is not the exact match of all trades in the bucket in category (A).  This "Bargain" trade is a subset of category (A).  
• Note that "noise" will sometimes work for trade entries and sometimes against trade entry.
• However, within the complete dataset of trades, there IS an area where "noise" becomes "information."  
• And roughly, the numbers for this trade might NOW be something like this: 
• 44% chance of Profitable Trade (market is moving against the desired long position)
• Avg Gain == 1600
• Avg Loss == 1100
• Note that this subset has slightly lesser trade parameters -- because there is "more information" based on the lower price. 

Although this example is simplified, our technical and quantitative trading strategies take these factors --  as well as other quant research and volatility / risk management -- into consideration.  

February Recap for Markets

February saw rising stock prices, slightly lower bond prices -- and mixed results for managed futures programs. The Middle East unrest created volatility in the energy markets.  This resulted in both winning and losing trades in the energy sector, with net profits for the month in crude oil trades.

Our zFutures Diversified Program, tracked at Collective2, was slightly higher at +0.5%, while the z-Trader Short-Term Program registered a +10.6% gain.  

The zFutures Diversified Program can be carved into two main sectors (Financials & Commodities).  The z-Trader Financials Program gained +4.7% with profits in the currencies, bonds, and precious metals.  These gains, however, were offset by losses in the z-Trader Commodities Program (with the grains and softs being the main culprits), leading to a drop of -8.3%.  The Financials & Commodities Program offer good diversification to one another -- and together, will approximate the Diversified Program, at higher leverage (but offer the benefit of a lower account size). 

The z-Trader Short-Term Program rode the S&P to fairly steady gains during the month.

AN INVESTMENT IN FUTURES CAN RESULT IN LOSSES.
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
ALL RESULTS MUST BE CONSIDERED HYPOTHETICAL RESULTS, WITH MANY INHERENT LIMITATIONS.

z-Trader Quant Systems & Collective2

We have used a system developer name of "z-Trader" to post the results of quant trading strategies on Collective2 (C2), a third-party tracker.  We have created four programs on C2 as follows:

zFutures Diversified (Adamah Cap)

z-Trader Commodities

z-Trader Financials

z-Trader Short-Term

In addition, note that we have a track record and/or hypothetical results that go back to 1996.  Performance on C2 must be considered hypothetical, with all of the risk disclosures associated with futures trading and hypothetical results.  

AN INVESTMENT IN FUTURES MAY RESULT IN LOSSES.

PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.

zFutures Diversified Program (Adamah Capital): is a fully-diversified program that trades both Commodities & Financials.  The Diversified Program was posted on C2 about 8 months ago and appears on C2's leaderboard.

http://best-tradingsystems.collective2.com/

In order to achieve lower account sizes (as requested by several C2 users), we recently created the z-Trader Commodities and z-Trader Financials Program.  On average, these two programs will combine to be a good proxy for zFutures Diversified (although with more leverage to achieve the lower account sizes).  Commodities have had a few good months, while Financials (currencies in particular) have struggled the past 1-2 months.  Over the long-term, we expect the two programs to have similar levels of performance.  The programs offer good diversification to one another.   

z-Trader Short-Term applies similar approaches as our other programs -- but with a shorter-term outlook that can be applied to large markets (and markets that exhibit volatility).  The program trades markets such as the S&P, energy & metals, with a focus on the E-Mini S&P.  

Please contact us for more information.

Managed Futures Program and Risk

Our managed futures program, zFutures, has been appearing on the leaderboards at Collective2 for a while. There seems to be a glitch, but the program is still appearing on their System Finder filter:

http://www.collective2.com/cgi-perl/t200.mpl?want=finder

zFutures averages more than 2 weeks per trade, which helps its "realism," "slippage" stats -- as well as longer-term performance with respect to commissions. zFutures' components (z-Trader Financials and z-Trader Commodities) will have similar results in the long-term -- although this month, commodities have been profitable while financials have been consolidating / reversing.

With the recent volatility in financials, there has been a lot of chatter about risk management. We like Collective2's analytical tools. We note that zFutures has "Low" (or na) risk in every single trade it has made - except one, which was "Normal." In addition, the less-diversified Commodities & Financial components have "Low" to "Normal" risk levels. These programs are slightly more aggressive to achieve lower account sizes, but use the same trading approach.

Risk management and preventing losses from accumulating are key parts of all of our programs -- and are key to "surviving volatility" and good long-term performance.

AN INVESTMENT IN FUTURES MAY RESULT IN LOSSES.

PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.

THESE RESULTS SHOULD BE CONSIDERED HYPOTHETICAL, WHICH CARRIES MANY INHERENT LIMITATIONS.

Commodities: Prices & Volatility Increase (Capturing Profits with Managed Futures)

Below are excerpts from our SeekingAlpha article on the recent spike in commodity prices -- and sudden sharp reversal. The increased volatility presents challenges to CTAs as futures traders balance the offsetting goals of:

• capturing additional profits, while
• protecting existing principal.

The article discusses methods that managed futures programs use to capture -- and retain profits from the futures markets. For the complete text and some charts, please visit the link.

http://seekingalpha.com/article/236692-commodities-prices-and-volatility-increase

Recent months have seen a continued decline in the U.S. dollar and an associated rise in commodities prices. After a relatively steady climb in commodity prices since May, commodity prices spiked early in November. Gold crossed above the $1400/ounce level and crude oil challenged the $90/barrel level. Along with the rise in commodity prices, volatility has suddenly picked up this past week in the commodity futures markets.

Some additional recent futures market activity, reflected by the Liquid Commodities Index (LCI):

• Since hitting a recent low at May 31, 2010, commodities have rallied strongly, with the LCI rallying more than 20%.

...

The investable, "Liquid Commodities Index" (LCI), was designed so that Adamah Capital could more easily track the price movements of the commodity futures markets. The LCI has a very high correlation (about 0.98) to other commodities indices, has slightly better risk/return characteristics, and is a good low-fee alternative for investors seeking the diversification benefits of the major commodities markets.

Managed Futures

In addition to a passive approach to investing in commodities, some investors seek a more actively-managed approach to futures, namely "managed futures." These products can capture both up and down movements within the futures markets. The Liquid Commodities Index showed the "buy and hold" performance of the commodities markets over the past several months.

...

... The Adamah Diversified Program captured profits in the futures markets over the past few months -- and protected profits during the sharp reversal of the week ending November 12, 2010, maintaining about 75% of the month's gains.

...

Many managed futures programs are systematic and aim to capture moves within the futures markets. While no program will be successful all of the time, a good trading strategy will attempt to capture the profit opportunities within the markets -- maintain these profits -- and minimize risk and whipsaw losses during more difficult trading environments.

Quantitative trading programs often manage and monitor risk on both a "trading system" level as well as on a "portfolio level." Trading strategies are often based on historical simulations, as well as statistical and systematic research. They are also tested in a multitude of ways to increase the comfort level of robustness and improve the "forward information" of the strategies. These methods include blind-testing, bootstrapping, Monte Carlo, and other methods to maximize the effective use of data.

Finally, CTAs monitor and manage risk within their portfolios using a number of metrics and models. In addition to capturing the opportunities the futures markets offer, it is essential to protect these profits. In today's economic environment -- with commodity price volatility increasing -- risk management and "protecting profits" are particularly important.

___

Carlton Chin, CFA, is the portfolio manager for ADAMAH Capital, which specializes in Computer Aided Research & Advanced Technology (CARAT). He founded Adamah with his long-time friend and associate, George Parr. Carlton has been quoted and featured in the Wall St. Journal, NY Times, MARhedge, Futures Magazine, and Financial Trader. He holds both undergraduate and graduate degrees from MIT.

Managed Futures: Performance & Diversification

Some of our readers know that our specialty is "alternative investments." We believe that alternative investments such as commodities, managed futures, and other diversifying strategies offer good diversification benefits to a traditional portfolio of stocks and bonds.

CARAT Capital was originally started to combine concepts of Modern Portfolio Theory, downside measures of risk, and robust trading systems. CARAT is an acronym for Computer Aided Research & Advanced Technology. Today, all money management activities are handled byAdamah Capital, a firm founded by Carlton Chin, CFA and his long-time friend and associate, George Parr.

Managed Futures have had a nice run over the past several months. Please check out the performance of our Diversified Program, tracked by a third-party firm. Carlton Chin, has a solid longer-term track record. Over time, managed futures have proven to earn returns from opportunities in the futures markets -- that are non-correlated to traditional assets such as stocks and bonds.

Please visit our websites and contact us for more information.

Article on Commodities Indices, Managed Futures & Diversification

As gold has continued to rally to all-time highs, there has been increased interest in gold, commodities, and managed futures as “diversification plays.” Indeed, these “assets” have been receiving increasing attention as true “asset classes” that offer good risk/returns and diversification benefits – for a traditional portfolio of stocks and bonds.

...

A “buy and hold” commodities approach has proven to be a solid diversifier over the years. However, just like “buy and hold” stock strategies have come under fire, the 2008 decline in commodities has led some investors towards actively “managed futures” as a good alternative investment.

...

During the 2008 financial crisis, many managed futures programs were able to profit from the extreme moves, with the Barclays CTA Index posting a +14.1% return.

...

For the complete article, please visit:

http://seekingalpha.com/article/226247-commodities-managed-futures-and-diversification