This report is an update for the Trend Composite and StochClose Rank Strategy that trades ETFs in the All-Weather List during bull and bear markets. Examining recent performance and signals can help us better understand the strategy and set realistic expectations going forward. The strategy performed well over the last 16 years, but not without bumps in the road. It returned 19.5% in 2021, but generated a loss in 2022 and is off to a volatile start here in 2023. The equity-curve below shows the value of the portfolio peaking in April 2022 and falling since then because the strategy is current in a drawdown period.
This strategy is designed to outperform SPY with significantly lower drawdowns. The blue line on the image above shows buy-and-hold for SPY. All strategies go through ups and down (profitable periods and losing periods). The red arrows show the losing periods (drawdowns).
The keys to long-term success are threefold. The strategy must be simple, it must make sense and it must control risk. This strategy has a few simple rules. It makes sense because it buys the strongest ETFs when they are in uptrends. The strategy controls risk by exiting when a downtrend signals and by not buying stock-based ETFs during bear markets.
Links to Main Strategy and Last Update
The usual disclaimers apply for trend-following and the analysis on TrendInvestorPro. Past performance does not guarantee future performance. You and you alone are responsible for your investment and trading decisions. Do your own due diligence.
Strategy Recap
Here is a recap for the strategy, which is detailed in this article. Basically, the 50 ETFs in the All-Weather List are divided into 36 stock-based ETFs to trade during bull markets and 14 non-stock ETFs to trade during bear market. The strategy can buy any of the 50 ETFs during bull markets, but can only buy non-stock ETFs during bear markets.
Bull Market Scenario
- Composite Breadth Model > 0
- Select from stock and non-stock ETFs that are in uptrends (Trend Composite>0)
- Buy the ETFs with the highest StochClose values (strongest price charts)
- Sell when the Trend Composite turns negative (downtrend)
Bear Market Scenario
- Composite Breadth Model < 0
- Stock-based ETFs are ineligible to buy in bear markets
- Select from non-stock ETFs that are in uptrends (Trend Composite>0)
- Buy ETFs with the highest StochClose values (strongest price charts)
- Sell when Trend Composite turns negative
Current Positions
The table below shows the gain/loss for the current positions (14). Five show a profit and nine show a loss. 12 of the 14 positions were initiated on December 1st, which is the day after the Composite Breadth Model turned bullish (November 30th). These ETFs had the highest StochClose scores when the Composite Breadth Model turned bullish. Their Trend Composites were also positive. Overall, it is a fairly defensive portfolio (risk-off): Consumer Staples (XLP, PBJ), Healthcare (XLV), Water (PHO), Aerospace & Defense (ITA), Insurance (KIE). There are no tech-related ETFs.
Keep in mind that positions are not sold until the Trend Composite turns negative. Positions in the stock-based ETFs were not sold when the Composite Breadth Model turned bearish in mid December because their Trend Composites were still bullish (positive).
Current Rankings
What if you started this strategy today? The table below shows the current ranking and the portfolio would be a little different if started on March 3rd. Seven of the fourteen positions are the same, which means seven are different. MDY, XES, PHO, ITA, XLF, XLI and KIE remain because they have relatively high StockClose values. FXE, XLE, XLP, IBB, XLV, PBJ and SLV did not make the cut because their StochClose values fell. Notice that today’s ranking shows more offense (risk-on) because the Technology SPDR (XLK), Semiconductor ETF (SOXX) and Home Construction ETF (ITB) made the cut. The image below comes from the Trend Comp and StochClose Rank table, which is updated daily.
How does someone start trading this strategy? I get this question often. Truth be told, I am not sure how different start dates will affect performance. Long-term, a few years, I do not think the start date will make that much difference. The long-term expectation is for 8-9 percent annual returns with 12-15% maximum drawdowns. Short-term, however, one could see an immediate drawdown or a gain. If starting the strategy now, I would suggest starting with the current leaders and perhaps avoiding ETFs that are already up double digits, such as XES.
Note that the ETF Trend Composite and StochClose Rank table tracks Trend Composite signals and StochClose values for 275 ETFs in the Masterlist. Users can narrow this to the All Weather List by entering “Allw” in the search box.
Historical, Yearly and Monthly Performance
The table below shows the performance metrics for this strategy since 2007. The Compound Annual Return (CAR) is 9.15%, the Maximum Drawdown (MDD) is 12.46% and the Profit Factor is 2.57. These numbers cover 434 trades over a 16+ year period. The long-term performance metrics are good, but keep in mind that short-term performance can, and does, vary.
The next image shows the breakdown by year and month. The strategy is up .80% so far in 2023 (blue shading). The strategy started the year strong with a nice gain in January (+3.5%), but gave it back in February (-3.5%). The strategy started March flat, but a 1% gain so far this month makes the strategy positive year-to-date.
Separately, note that the strategy was up six years in a row with four of these years posting double digit returns (green shading). Prior to this six year run, the strategy was down 5% in 2015 and returned just 5.8% in 2014. Performance chasers might have given up after two years of sub-par returns, only to miss a good six year run.
The Last 50 Trades (closed trades only)
The next image shows the last 50 trades and overall performance metrics for these trades at the bottom. These fifty trades extend back to March 2021 and cover almost two years. The red shading shows the losses and the green shading shows the profits. You can also see the exit signal on the right. Either the Trend Composite crossed below zero or the 20% profit target was hit.
Trades closed out in 2021 were mostly profitable with several hitting their 20% profit targets (bottom of table). 2022 was a lot different with most trades resulting in losses (red shading). Only 12 of the 32 trades closed in 2022 resulted in a profit. Even so, the strategy managed to catch a few big winners in the energy sector that hit their 20% profit target. Note that SPY was down 19.5% in 2022.
The bottom of the table summarized performance for the last 50 trades. Overall, there were 26 winners and 24 losers for a 52% Win Rate. The Average Profit was more than twice the Average Loss and the Profit Factor was 2.24, which is good. Despite a bad 2022, the strategy is holding up on a two year basis.
Conclusions
The Trend Composite and StochClose Rank Strategy is a classic trend-momentum approach that seeks to buy strength. The strategy does not take overbought conditions into account and often buys ETFs that are seemingly overbought. We never know in advance which trends will extend and lead to double digit profits, and which whipsaw and lead to losses. The strategy simply buys the strongest ETFs and rides the trend until it reverses or sells when the Profit Target is hit. It is systematic approach with a few simple rules. The more complex the strategy, the less chance it will continue working.
The usual disclaimers apply for trend-following and the analysis on TrendInvestorPro. Past performance does not guarantee future performance. You and you alone are responsible for your investment and trading decisions. Do your own due diligence.
