We have spent the past two months watching how these six different trading systems enter and exit positions in what has been an up and down market. When we started following these systems, the market almost immediately tanked into a correction. It then made a nice rebound, only to give back most of those gains. This has caused us to spend most of our time looking at how each of the systems is able to protect profits and preserve capital.
The interesting thing about this is that we would not be having this conversation if we had started the experiment at the beginning of the year. If that was true, we would be sitting on big profits in each of the systems, and this would just be a blip on the radar. Our returns have been radically altered by our arbitrary start date.
So what can we learn from this?
We know that we can’t do anything ourselves to change how the market performs, and we have to start at some point. Our only real solution is to understand that these periods of “blah” tend to happen from time to time. We could be at the topping point before a major bear market, or we could be simply catching our breath before the biggest bull market of all time. The only thing we know for sure is that the past two months haven’t gone the way we would like.
These non-trending periods are going to happen, and trend following systems aren’t going to perform very well during them. We have to keep in mind that better trend are coming, and historically our systems have been able to take advantage of them.
Comparing Our Systems
The order hasn’t changed much over the past week. Except for System 5, all of the systems were long all week, so they all took the same losses. The systems that trade with longer-term signals have all continued to outperform the systems with shorter-term signals.
The systems that were caught in short positions last week have also continued to suffer. While it is obvious that that was very unlucky, that is still a part of trading.
System 5 was the only system that didn’t take significant losses this week. That leaves it still sitting right in the middle of the pack. However, if it continues to make small progress every month while the other systems bounce back and forth, it may end up toward the top after a few more months.
System 2B continues to lead the way. It is still benefiting from getting out of the market quickly before it turned down for a bit in August. It is currently the only system that is outperforming a straight buy and hold strategy.
System 1 – Buy & Hold
Overall Return: +0.47%
Last Week: +1.46%
System 1 investors are not thrilled with the way things have played out since the Fed announcement last Wednesday. The SPY posted five straight down days from last Thursday to Wednesday before finally posting some gains on Thursday of this past week. The ETF wasn’t able to build on that, however. It was back down again on Friday.
Anyone with a buy and hold approach has now seen all of the gains they made last Wednesday completely evaporate into thin air. While losing one percent of its gains over the past week is not incredibly painful, the bigger problem with System 1 is that there is no way to stop the bleeding if things get worse. The only thing System 1 investors can do is keep hoping for hire prices. If prices go down, the only thing they can do is sit and watch.
System 2 – IBD Market Calls
Overall Return: A: -1.32%, B: +0.65%, C: -3.53%, D: -1.17%
Last Week: A: -0.35%, B: +1.64%, C: -2.58%, D: -0.20%
Here is a quick reminder about the different versions of System 2:
- System 2A – Long on Confirmed Uptrend, Cash on Market In Correction
- System 2B – Long on Confirmed Uptrend, Cash on Uptrend Under Pressure
- System 2C – Long on Confirmed Uptrend, Short on Market In Correction
- System 2D – Long on Confirmed Uptrend, Cash on Uptrend Under Pressure, Short on Market In Correction
Each of the four versions of System 2 came into this week with long positions because IBD has labeled this market as a Confirmed Uptrend. Despite all of the down days that have been posted on the indexes in the past week, the distribution day count is still only at 4 for the S&P 500 and 2 for the Nasdaq. This means that we are still in a Confirmed Uptrend. It would take at least a few more distribution days for us to fall into a Market Under Pressure condition.
Since there was no change in the market outlook this week, each of the four versions of System 2 were stuck eating their loses. With all of the versions moving down together, we are still seeing the impact of System 2B getting out as soon as the market started to falter in August and avoiding being caught in a short position a few weeks ago.
In the coming week, if we do get a couple more distribution days, IBD will likely move its outlook to Market Under Pressure. This would cause versions 2B and 2D to shift to cash positions. Systems 2A and 2C need a full fledged Market in Correction signal to get out of their positions.
System 3 – 10/100 Moving Average Crossover System
Overall Return: +0.47%
Last Week: +1.45%
System 3 took the same losses as System 1 and System 2 as it watched the SPY lose its 10-day line this week. Losing the 10-day line is the first step towards moving towards a cash position. If the price continues to head south, the 10-day line will have no choice but to follow it down. If the price continues down crossing past its 100-day line, the 10-day line will follow it there as well. This would be System 3’s signal to get out of its long position.
Of course, there would have to be quite a bit of further negative action in order for that to happen. At this point it is more likely that this is just a bump in the road. The nice thing about system trading is that we don’t have to consider where we think the market will go. All we have to do is watch what actually happens and follow our rules accordingly.
System 4 – 89/13 Breakout System
Overall Return: -4.10%
Last Week: -3.17%
System 4 has really been struggling since we started this experiment in mid-July. It entered a long position last Thursday at the beginning of a stretch where the SPY closed down on six out of seven days. As you can see on the chart, the price has fallen below the 13-day moving average and is getting dangerously close to the 13-day low. Any further losses will likely trigger an exit to cash.
While System 4 has been ridiculously unlucky over the past few months, the one thing that I like about it is that it is one of the quickest systems to generate an exit signal. Obviously this hasn’t worked well with the entries that it has been dealt recently, but it does mean that this system would protect any profits it generates.
System 5 – 3 Day High/Low Mean Reversion System
Overall Return: +0.44%
Last Week: +0.50%
Coming into the week, we thought that getting two more down days in a row to signal an entry for System 5 was a long shot. As it turns out, we got three more down days, which gave System 5 an excellent entry price at Wednesday’s close after getting an entry signal from Tuesday’s action.
Once the position was established at Wednesday’s closing price, it almost got an exit signal on the very next day. However, despite breaking through the 5-day line on Thursday, the SPY failed to close above it. The down action on Friday took the position into negative territory, but just slightly.
Moving forward, we are still looking for a close above the 5-day moving average that will signal an exit to cash. If that happens soon, we will likely turn another small profit on the trade. If the current downward action continues, it is more likely that this trade will turn negative as the 5-day line will continue to fall.
System 6 – Simple Moving Average Systems
Overal Return: A: +0.47%, B: +0.47%, C: -3.07%, D: +0.47%, E: +0.47%, F: -6.53%
Last Week: A: +1.46%, B: +1.45%, C: -2.12%, D: +1.46%, E: +1.46%, F: -5.62%
Here is a quick reminder about the different version of System 5:
- System 6A – Long above 200 day SMA, Cash below 200 day SMA
- System 6B – Long above 100 day SMA, Cash below 100 day SMA
- System 6C – Long above 50 day SMA, Cash below 50 day SMA
- System 6D – Long above 200 day SMA, Short below 200 day SMA
- System 6E – Long above 100 day SMA, Short below 100 day SMA
- System 6F – Long above 50 day SMA, Short below 50 day SMA
All of the versions of System 6 posted the same losses as all of the version of System 2, as well as System 1, System 3, and System 4. Despite the large string of losses, the SPY is still trading just a bit above its 50-day line. In order for any of these systems to make a move, that line would first need to be penetrated.
While there weren’t any significant moves this week, once again it is interesting to note that Systems 6C and 6F are lagging because of their short term signals. It is also still worth noting that System 6F has been absolutely crushed because it was caught in a short position on the day of the Fed announcement last week.
In the coming week, if the 50-day line is broken, System 6C will go to cash and System 6F will go short. If the price action trends further south the other versions will signal moves when their moving averages are broken.