... He shall measure it with a line of chaos And with weights of emptiness. (Isaiah 34:11)
Equity markets can be timed by properly designed logic engines. FF5 (FoxForce5) is a logic engine, developed to illustrate this. Using two, more or less random but logical measurements, every closing daily market state can be assigned one of five possible codes. If the daily closing state matches yesterday's state, favorable conditions exist, and any equity is a buy.
Compared to a broad-based index, the technical position of specific individual equity buy candidates is trivial. Individual equity return streams are overwhelmingly determined by the action of the index. FF5 performs best using a broad-based index ETF such as SPY. SPY is better to use for signal calculation than $SPX or S&P 500 e-minis.
There are two major selection risk issues that affect returns:
In order to conclusively demonstrate the soundness of the analytical framework, 24 complex strategies based on three indicator types and 4 time periods in days are defined. Each strategy requires two indicator/length combinations. 3 x 4 x 2 = 24.
The three indicator types are:
The four lengths are: 3, 7, 13, and 21 days.
If there is only a single number in the strategy such as em3, that means that the 3-day time period is used for both e and m.
Buy and Hold performance is the first data line and highlighted in yellow. All 24 of the strategies clobber buy and hold for all six of the ETFs. The best performing strategies are highlighted in green.
TRet is the correct way to measure the relative strength of the strategies. TRet is the sum of the natural log returns of the six ETFs over the period for each strategy. TRet shows the return that would be achieved by trading each ETF consecutively in any sequence. That is not exactly what happens in this universe, because that would take about 18 years (3 years x 6 ETFs). Nonetheless, TRet is the best way to rank these things.
Days shows the number of days the strategy was long.
pSPY shows the number of winning days per 1,000. An investor who bet that SPY would finish a day with a gain every day of the period would have won 56.9% of the time. That number is high historically, but it stays consistently over 50% long term, my guess is 54%. All of the other strategies beat that number significantly.
Note that buy and hold for the 3x Bulls returns less than buy and hold for the vanilla ETF counterparts for the period (TRet 1.68 vs 2.15). TQQQ and SOXL did OK, probably not by enough to pay for the extra stress.
The strategies applied to the 3x Bulls, however, produce returns that dwarf the vanilla ETF returns. Playing m13m21 and making 32x your initial investment with SOXL or 30x with TQQQ in less than 3 years is serious money.
A zombie (Haitian French: zombi, Haitian Creole: zonbi) is a fictional undead corporeal revenant created through the reanimation of a corpse.
Zombi is an acronym for Zero Optimized Median Based Inferentiation. A Zombi strategy has signals calculated based on the signals of other strategies. This requires at least one more processing step.
Trend following was the proto-Zombi concept. The market is considered to be trending if fewer than a longer term median number of Classical Specter/FF5 buy signals appear in a shorter-term timeframe.
Currently, the 50-day number of classical buy signals in each strategy is compared to the 200-day median number. If the 50-day number is more than 1 less than the 200-day median, the market is considered trending, and the appropriate trend following proto Zombi will go long regardless of the daily signal.
The table is sorted by TRet. A Z is placed in front of the strategy names. It is important to note that Buy and Hold has about an average return (2.15) but is in the market about three times longer (724 days) than the median number of days for the other strategies (247).
These are decent results, especially the ones with the higher returns. A developer, using traditional tools, would have to be quite strong to achieve this. I'm not sure such a person exists. However, these results are mediocre compared to the tables where Buy and Hold was the worst strategy.
3x Bull trend following is much more impressive. Both trend following tables have vanilla and 3x Bulls going long on the same days, so the return differences are purely technical in nature.
I've been interpreting the 3x outperformance as symptomatic of structural deficiencies in the product. If I was younger, perhaps I'd be more concerned about what these abominations are doing to the financial system. The SEC says no problemo.
Beating buy and hold for strong stocks is more difficult than doing it for weak ones. Even the strategies with the lowest overall returns do quite well with SPXL, UDOW, TNA, and FAS.
Trend following is an example of this. Equity performance above and below medians is analyzed.
Another example of a mediano zombi is going long if a reasonable number of other strategies are long. This can be applied to both vanilla and trend following strategies. Zmed1 goes long if at least 12 (of 28) vanilla strategies are long. Zzmed1 goes long if more than four strategies are in trend following mode.
After vanilla daily signals are calculated, consenso determines and uses the most prevalent one. The consenso zombi is then treated as a normal strategy. The table below shows the signals each consenso considers.
The 4 consenso strategies make 28 strategies plus Zmed1 for 29. There are 29 vanilla strategy types and 29 trend following for a total of 58.
Buy and Hold has now fallen to its rightful place on the bottom for both strategy types. The strategies with the green highlighting do better than the top performers in the other tables.
The 3x Bulls show similar results to their vanilla counterparts except they make orders of magnitude more money.
In Adjusting Strategies, I showed that normal and trend-following strategies can be combined to substantially improve returns. However, to properly implement this concept, it was necessary to rewrite the FF5 logic engine.
Like everything with computers, the problem is pretty simple. If this or that strategy is long, go long, otherwise go flat. The major issue is that "this or that strategy" will inevitably change to "this, that, or the other strategy" in the near future, particularly if you're looking at about 60 of them. Anyway, the simple problem was difficult, and I wound up programming my own "and" and "or" functions
A sample combination that plays pretty well is: go long if normal Zcon3 is long, or trend following Zcon4 is long, or the specific strategy is long; otherwise, go flat.
Buy and Hold is on the bottom, and even the worst strategies are more or less doubling buy and hold returns for all the securities. The zombies consistently perform well as a group.
Needless to say, the 3x Bulls also do pretty well.
Even the worst performing of the Zombi strategies makes over 10 times the money as buy and hold in any of the six equities.
These strategies perform with a high degree of reliability although the three-year period we look at here has been especially good for them.
I have been describing my equity market research project on Seeking Alpha since July 2019.
Finite State Accounting provides an overview of the architectural orientation of the analysis. An important concept is, we are equally interested in equity performance under all conditions.
Specter: A Finite State Trading Strategy proposed that an individual equity's price movement is directly related to the technical condition of the overall market. The article demonstrated that overall technical market conditions vastly outweigh the technical conditions of a specific equity.
Understanding Complex Strategies With FoxForce5 describes a hexadecimal framework to support complex finite state gate logic. The strength of the framework was demonstrated with both Specter and vanilla signals.
FoxForce5: A Force To Be Reckoned With showed how Specter/FF5 consistently beats buy and hold returns over long time periods on all major sector ETFs.
Adjusting Strategies For Underlying Market Conditions described a simple methodology to determine whether an uptrend exists powerful enough to override default flat strategy decisions. This was the introduction to Trend Following.
Goldilocks and the 3x Bulls introduces the rewrite of the logic engine that was used for this article.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Originally posted here:
Return Of The Zombies - Seeking Alpha
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Reviewed and Recommended by Erik Baquero