Traders use relative performance to find stocks that are outperforming the broader market. Relative performance is also important for evaluating trading strategies. A strategy with a relatively high drawdown should deliver a relatively high return. Strategies with average returns and high drawdowns warrant a rethink. As noted last week, I am questioning the relative value of ETF strategies because of higher drawdowns over the last six months. The dynamics have changed and so is the offering at TrendInvestorPro (details below).
See this article for details on how ETFs work and the reasons for underperformance. [1]
The problem becomes apparent when we compare the drawdowns with the returns. We can compare risk and reward by using the MAR Ratio, which is the Compound Annual Return (CAR) divided by the Maximum Drawdown (MDD). A MAR Ratio of 1 is great because it means the maximum risk (drawdown) is equal to the return. This means we are getting rewarded for our risk. MAR Ratios of 1, however, are hard to achieve.
The ETF strategies performed fine from 2007 to the middle of 2022 (backtests) with Maximum Drawdowns just below 14%. This changed with above average drawdowns in December 2022 and the first quarter of 2023 (16-18%). The lower returns from ETF strategies were tolerated because the drawdowns were lower. This dynamic changed and prompted my move to quantified strategies that trade stocks.
There are two changes afoot. First, future strategy development will focus on stocks. This means quantified strategies that trade stocks in specific indexes (S&P 500, Russell 1000, S&P 1500 etc…). Second, future reports and videos will focus on these strategies. I already have some stock-based strategies in the pipeline and plan to roll these out over the coming weeks and months. The ultimate plan is to smooth returns by combining multiple strategies.
Note that I will continue to update the ETF signal tables, the Market Regime page and the Composite Breadth Model. I will publish an in-depth strategy piece and strategy-related video on a weekly basis. I will also update existing strategies on a regular basis. Unfortunately, this means something has to give and that something is the discretionary chart analysis provided in Tuesday’s report and Wednesday’s video. These will be replaced with the in-depth strategy piece and strategy video.
The change starts in May.
Thanks for your understanding and I welcome your feedback. [2] support@trendinvestorpro.com