The Trend-Momo Bull-Bear ETF Strategy Update (part 11) – Performance Update,  A Tough 2022, New Positions in December

Today’s report will update the Trend-Momo Bull-Bear ETF Strategy that trades the All Weather ETFs. 2022 has been a rough year and there are still two weeks left. The Composite Breadth Model turned positive on November 30th and this means stock-based ETFs became eligible for the strategy. I will update strategy performance and show the new positions from December 1st. Systematic trading is robotic and just takes the signals as they come. The strategy does not consider CPI numbers, Fed meetings, subjective chart assessments or bad hair days.  

Programming Note: The CPI numbers will be released today and the Fed policy statement will be on Wednesday. What could go wrong? I will post the normal video and Composite Breadth Model update on Wednesday. Thursday’s report will cover the charts and the reactions over the last two days.

Strategy Overview

There are three components to the Trend-Momo Bull-Bear ETF Strategy: broad market timing, trend and momentum. The Composite Breadth Model defines the broad market environment as bullish or bearish. This tells us which ETFs are eligible for trading. The All Weather List consists of stock-based ETFs, which are preferred in bull market, and alternative ETFs, which pick up the slack during bear markets. The Trend Composite defines the trend for the individual ETFs so we can focus on uptrends. StochClose values rank ETFs in uptrends to find the strongest.

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.

Testing Period

The backtest period extends from January 2007 until December 9, 2022, which covers almost 16 years. There are two reasons for this start date. First, price history for these ETFs extends back to 2006 or earlier. Second, we need to include at least one bear and one bull market. As the chart below shows, this period includes the Global Financial Crisis (GFC), some short bear markets, some volatile periods, the covid crash and the 2022 bear market. This period has it all.

Testing Parameters:

This test will use the All Weather ETF List (here), which has 50 ETFs. There are 36 bull market ETFs (stock-based) and 14 bear market ETFs (bonds, commodities, currencies). This is a relatively balanced list covering the major asset classes. You can read more on this list here.

36 Stock-based ETFs: SPY, RSP, MDY, IJR, IWC, QQQ, DVY, XLK, XLY, XLF, XLI, XLC, XLV, XLP, XLE, XLB, XLU, IYR, FDN, SOXX, IGV, ITB, XRT, KIE, KRE, ITA, PBW, IBB, IHF, IHI, XES, XOP, GDX, XME, PHO, PBJ

14 Alternative ETFs: AGG, IEI, IEF, TLT, LQD, HYG, GLD, SLV, DBE, DBB, DBA, FXE, FXY, UUP

  • All Weather ETF List for universe (50 ETFs)
  • 14 Equal-weight positions
  • Starting Portfolio: $100,000
  • Signals based on closing prices
  • Buy/Sell based on opening prices the next day
  • Commission per Trade: $2
  • Slippage per Trade: 2.5 basis points (.025%)
  • NO Dividends

Dividends are not included so actual returns would be slightly higher and the drawdowns slightly lower, perhaps .50% per year. To err on the safe side, I added a small commission ($2) for each trade and some slippage (.025%). The signals are based on closing prices with the buy/sell occurring on the next open (one day delay).

Generating Signals

The strategy buys the best performing ETFs with a positive Trend Composite. The Trend Composite is the trend filter and the trend must be up (positive Trend Composite). Performance is based on StochClose (125,5) and the strategy buys the ETFs with the highest StochClose values. This is the momentum component.

The strategy can buy any ETF when the Composite Breadth Model (CBM) is positive, but only bear market ETFs when the CBM is negative. This insures that the strategy focuses on non-stock ETFs when the CMB is negative. The strategy sells ETFs when the Trend Composite turns negative.  Note that the strategy does not sell all stock-based ETFs when the Composite Breadth Model turns negative. The sell signal is when the Trend Composite turns negative.

Bull Market Scenario

  • Positive Composite Breadth Model
  • Filter out ETFs with negative Trend Composite
  • Buy the ETFs with highest StochClose values
  • Sell when the Trend Composite turns negative

Bear Market Scenario

  • Negative Composite Breadth Model
  • Filter out stock-based ETFs and ETFs with a negative Trend Composite
  • Buy ETFs with highest StochClose values
  • Sell when Trend Composite turns negative

Chart Example for Signals

The chart below shows the S&P MidCap 400 SPDR (MDY) with the Trend Composite, StochClose and the Composite Breadth Model. MDY is eligible for trading when the CBM is positive because it is a stock-based ETF. The CBM was positive from February 2nd to 14th and again from March 25th to April 7th. MDY, however, was not eligible during these periods because the Trend Composite was negative and it was in a downtrend.

The Composite Breadth Model was negative from April 18th to November 29th and stock based ETFs were ineligible during this time period. Stock-based ETFs became eligible on November 30th when the CBM turned positive. MDY was in an uptrend at this stage and made the trend cut. The strategy added it to the portfolio on December 1st because it’s StochClose value was the 13th highest when the Composite Breadth Model turned positive.

The image below shows the ETF Trend Signal and Ranking Table based on the November 30th close, the day the Composite Breadth Model turned positive. The ETFs with the blue shading (MDY, UUP) were already in the portfolio. SLV was added on November 9th and UUP was added on June 18th, 2021.

With only 2 of 14 positions filled on November 30th, there were spots for 12 new positions when the CBM turned positive. The 12 ETFs with positive Trend Composites and the highest StochClose values made the cut (green shading). The current portfolio comprises the 14 ETFs with the blue and green shading. Note that the percentage change in the right column is the change since the Trend Composite turned positive, not the change since added to the portfolio.

The next chart shows the recent signals in the Silver ETF (SLV). The Trend Composite turned positive on February 23th and the Composite Breadth Model was negative at the time. SLV is an alternative ETF that is eligible regardless of the Composite Breadth Model signal. The strategy bought SLV on February 24th and sold on April 29th, the day after the Trend Composite turned negative. This trade lost 7.85%.

The Trend Composite turned positive on November 9th and the strategy added SLV to the portfolio on November 10th. The CBM was negative, but SLV was eligible because it is an alternative ETF (a non-stock ETF). Keep in mind that signals trigger on the close, while the buy/sell orders trigger the next open.

Note that the Trend Composite is part of the TIP Indicator Edge Plugin for StockCharts ACP. I use Amibroker because this is where I can build the indicators, test the indicators and fully customize the chart views.

Performance Metrics

The performance tables show:

  • Compound Annual Return (CAR): annual return for the strategy
  • Maximum Drawdown (MDD): biggest peak-to-trough decline in portfolio value
  • Win Rate: percentage of winning trades
  • Gain/Loss Ratio: average gain divided by the average loss
  • Profit Factor: total profits divided by total losses

Trend-followers would like to see a Gain/Loss Ratio above 3 to ensure the winners are bringing in much more than the losers. A Profit Factor of 2 means total profits are outpacing total losses by a two to one margin. This is the ex-post reward-to-risk ratio and I would like to see a Profit Factor above 2.

Setting the Benchmarks

Before looking at some performance metrics, let’s look at the returns for buy-and-hold. The first table shows results when buying and holding SPY and when buying and holding all 50 ETFs in the All Weather List. SPY is up around 178% since January 2007 with a Compound Annual Return of 6.64% (without dividends). The Maximum Drawdown was 56.5% in 2008 and there was a 33% drawdown in March 2020.

Buying and holding all 50 ETFs underperformed buy-and-hold for SPY. This is because 11 (28%) of the 50 are down for the entire period. The Oil & Gas Equipment & Services ETF (XES) is down 75% and the Clean Energy ETF (PBW) is down 50%. The Gold Miners ETF (GDX), DB Agriculture ETF (DBA), DB Energy ETF (DBE), DB Base Metals ETF (DBB) and Oil & Gas Exploration & Production ETF (XOP) are also down. Not everything goes up over the long-term.

Trend-Momo Bull-Bear ETF Strategy Performance

The next table shows performance metrics for the ETF Trend-Momo Bull Bear Strategy. The Compound Annual Return (CAR) is a respectable 8.96%, but the Maximum Drawdown (MDD) is 16.46%. This drawdown occurred in December 2022 and exceeded the 2012 drawdown of 15.23%. Year-to-date, the strategy is down 11.7%, which is the worst year yet.  

Despite a rough ride in 2022, the overall metrics are still pretty good. The Win Rate is 52%, the Gain/Loss ratio is close to 5 and the Profit Factor is close to 4. The strategy performed well the last three years: +11.70% in 2019, +21.6% in 2020 and +17.8% in 2021. It is giving back some of these profits here in 2022 and this is part of the normal ebb and flow for returns. We cannot expect the equity line to go straight up.

Charting Performance

The first image shows the equity curve since 2007 (start = 100,000). The red arrow lines show some periods when the Composite Breadth Model was negative (bear market). The equity curve usually flatlines during a bear market. Overall, the equity curve worked its way higher the entire period and the strategy outperforms buy-and-hold. The strategy performed well during the covid crash as the equity line held well above its 2018 low. Recently, equity hit a new high in April and then fell into December with the biggest drawdown (16.54%). This means the equity line fell 16.54% from its April high.  

The next image shows the drawdowns, which measure the percent declines from equity highs. The drawdowns dipped into the 12-14% area from 2010 to 2021 and then exceeded the 14% level here in late 2022. I run backtests to understand strategy performance and set expectations. This drawdown exceeded expectations, but I do not think the strategy is broken. It was just a rough year for trend-momentum strategies.  

The next image shows the monthly and yearly returns with 2022 highlighted in red. January and June were the big down months (-6.9% and -8.9%). Overall, the strategy is down 11.7% year-to-date and this is the worst year so far. The blue shading on the right side highlights the rough years with four miniscule returns and one negative return.  Keep in mind that these returns do not include dividends so actual returns will be slightly higher. The rough years correspond to rough years in the stock market. SPY was down 38% in 2008, .2% in 2011, .8% in 2015, 6.3% in 2018 and 16% here in 2022.

The next image shows some prior positions this year and the open positions. The strategy experienced a string of losses from late April to June (red shading) and then closed out a few winners (green shading). The blue shading shows the percentage gains for the current positions. There are 2 winners (UUP, SLV) and 12 losers. The strategy will hold these positions until the Trend Composite turns negative.

The 20% Profit Twist

The Maximum Drawdown improves when adding a 20% profit target. This means selling when a position is up by 20% or more. The Compound Annual Return is slightly lower (8.96% vs 8.75%), but the Maximum Drawdown is much lower (16.46% vs 13.11%). The big improvement in the drawdown makes up for the slight decrease in returns. There are also more trades when taking a 20% profit (275 vs 417). The Gain/Loss Ratio and Profit Factor were not as good, but they are still respectable numbers.

Conclusions

The Trend-Momo Bull-Bear ETF Strategy beats the returns for buy-and-hold with significantly lower drawdowns. Even so, there will be drawdowns and periods of underperformance along the way. Backtests and the resulting performance metrics help traders set expectations. Nevertheless, the markets are masters at delivering the unexpected. It just goes with the territory. The current drawdown is the highest so far and this confirms that your biggest drawdown is usually in the future.  I do not think the strategy is broken. Instead, the markets are going through a rough patch and trends are failing to extend. This will change one day and some big trends will again emerge. This strategy will catch and ride these trends when the time comes.

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.

Thanks for tuning in and have a great day!
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