V&M Premium Portfolio: 2020 Mid-Year Report Card Through Week 26

V&M Premium Portfolio: 2020 Mid-Year Report Card Through Week 26

Introduction

Through Week 26 of 2020, the Premium Portfolio has gained +14.43%, substantially leading the S&P 500 benchmark by +21.29%. These returns were achieved by actively trading in 11 fewer weeks (nearly halted for an entire quarter) using the alerts of the Momentum Gauge™ timing signals.

The Premium Portfolio began in 2018 with a January 2nd start date and a selection model based around a maximum of 10 actively traded stocks. The objective of this fund continues to be to outperform the S&P 500 using actively managed selections in the strongest sectors, while allowing deliberate stock turnover in order to include new members on more frequent selections and timely gains.

Unlike traditional hedge funds, this fund is interactive and transparent, allowing continuous member feedback, critiques, requests for charts, analysis and explanations or justifications on a daily basis. It serves both as a model to try to beat the benchmark indexes as well as a platform to instruct and share the rationale behind many purchases and sales throughout the year. Additionally, every transaction is sent as an alert to members and often includes charts, analysis, and some review of the MDA selection criteria from my doctoral research.

Last year’s Premium Portfolio report card is available here:

The primary trading rules of the Premium Portfolio are as follows:

  1. The maximum number of portfolio stocks was increased to 20 from 10.
  2. The stop loss on all stock purchases was set at 10%.
  3. Active trading periods were based directly on the scores of the Momentum Gauge signals for the entire year.
  4. No trading occurs whenever the signals turn negative, and trades remain halted until positive conditions return.

Additional constraints related to selection also include minimum market capitalization of $500 million and minimum price and trading volume levels.

Applying these rules has delivered gains that have outperformed the S&P 500 every year since inception, while using significantly fewer weeks to deliver these results each year.

Reviewing the 2020 Returns

The lowest weekly return in the Premium Portfolio in the first half of 2020 was reached at the end of Week 22 with a return of -0.17%, while the S&P 500 declined over -33% at the lowest point in March.

The chart below shows the returns for each of the 18 actively traded weeks (full and partial) when the Momentum Gauges™ remained positive in 2020.

The expanded chart of the Premium Portfolio below displays the 11 weeks (full and partial) during which trading was halted based on the negative signals from the Momentum Gauges™ scores. Some overlap occurs with active weeks.

These gaps in the Premium Portfolio above correspond to the Momentum Gauge™ topping signals shown below on the S&P 500 chart. These halts produced by the Momentum Gauge™ signals helped limit downside losses in the portfolio, as shown on signals 5, 6, 7, and 8 below. More of this methodology is detailed in my recent article on the 8th market correction signal that has sent the portfolio to cash again this week in a very volatile year:

For the more adventurous trader, using the halted periods of the Premium Portfolio as a signal to buy inverse bear funds further increased annual returns.

The bull/bear ETF trading signal page now includes many more combination trades sets when the Momentum Gauge timing signal is issued.

  1. MicroSectors FANG+ 3x Index bull/bear (FNGU)/(FNGD) +215.53%
  2. Direxion Daily S&P 500 3x bull/bear (SPXL)/(SPXU) +109.92%
  3. SPDR S&P 500 (SPY)/ ProShares Short S&P 500 (SH) +41.99%
  4. Alpha Architect Intl Momentum (IMOM)/Dorsey Wright Short (DWSH) +61.24%
  5. ProShares UltraPro Nasdaq 3x bull/bear (TQQQ)/(SQQQ) +127.97%
  6. Direxion Daily 3x Small Cap bull/bear (TNA)/(TZA) +181.24%
  7. Direxion Daily 3x Biotech bull/bear (LABU)/(LABD) +77.07%
  8. ProShares Short VIX Short-Term bull/bear (SVXY)/(UVXY) +321.07%

For example, substituting even a 1x inverse fund like ProShares Short S&P 500 during the times the Premium Portfolio went to cash this year could provide additional gains. This is illustrated on the example from 2019 with returns from an inverse fund inserted in the period when the Premium Portfolio went to cash for enhanced annual returns. Other short fund opportunities could be applied during these negative signal trading halt periods.

Additional statistics of the Premium Portfolio in 2020

The averaging losing stock in the Premium Portfolio so far lost -4.82%, even though I use a fixed 10% stop loss rule for the portfolio. Often, the MDA criteria and technical indicators signal an early exit point. Among just the positive gaining stocks the average return was +9.47%.

The top 20 most positively gaining stocks this year are listed in the table below, with a few stocks reaching the top 20 more than once in their momentum breakout cycles.

Symbol Company Name Sector Gain
TBIO Translate Bio, Inc. Healthcare 59.3%
ENPH Enphase Energy, Inc. Technology 41.0%
IBTX Independent Bank Group Financial 39.3%
BYND Beyond Meat, Inc. Consumer Goods 34.2%
GAN GAN Limited Consumer Goods 26.8%
EXPI eXp World Holdings Real Estate 24.8%
CDLX Cardlytics, Inc. Technology 23.1%
TALO Talos Energy, Inc. Energy 22.8%
OPRA Opera Limited Technology 22.5%
PI Impinj, Inc. Technology 21.2%
OSPN OneSpan, Inc. Healthcare 18.8%
VIVO Meridian Bioscience, Inc. Healthcare 18.5%
INMD InMode Ltd. Healthcare 18.5%
CLDR Cloudera, Inc. Technology 17.9%
LVGO Livongo Health, Inc. Healthcare 15.5%
TER Teradyne, Inc. Technology 14.0%
WD Walker & Dunlop, Inc. Financial 13.6%
OPRA Opera Limited Technology 12.4%
CLDR Cloudera, Inc. Technology 11.8%
CRTX Cortexyme, Inc. Healthcare 11.7%

The average stock holding period was 9.71 days, down significantly from the average holding period of 13.94 days last year when market volatility was considerably lower than 2020. The duration is based both on the MDA criteria and technical indicators for selling, as well as the perceived need to provide frequent selections for new members to participate in timely gains.

One of the most common questions I receive regarding the Premium Portfolio is whether stocks currently in the portfolio are still good enough to buy days after the purchase alert was given. The best answer I can offer is that among the 20 top-performing stocks above, the average holding period was 12.8 days, or just over 2 trading weeks.

The Pareto Chart of Performance by Sector through the midpoint of 2020 for the Premium Portfolio shows that the selection models worked best for healthcare and technology stocks. These two sectors accounted for 81.4% of the gains in the portfolio. Somewhat consistent with the impact from the pandemic, selections in the Services, Communications, and Basic Materials sectors resulted in losses. No Utility sector stocks were selected for the portfolio, and selections from 7 of 10 sectors produced gains using the model throughout the year.

The Premium Portfolio Vs. Hedge Funds in 2020

There are many differences between the Premium Portfolio and the challenges and constraints of running a hedge fund. One of the most positive differences is that the Premium Portfolio does not require anywhere near the fees of 2% management and 20% performance as charged by many hedge funds.

The strategy for the Premium Portfolio selection follows my MDA research in finding selections that try to front-run hedge fund selection preferences. As I have detailed in many articles and in the Primer on Momentum Accelerators, there are certain characteristics that attract large inflows of investment capital. Additional information is available in articles for members and scholarly research like “Cracking the Hedge Fund Code.” Much of what I offer to traders are strategies and ways to think like hedge fund managers who watch liquidity and money flows very closely.

Current hedge fund performance overall into 2020 is struggling more than last year to deliver good results. This is understandable in the current environment when we have had the highest levels of volatility in more than a decade.

On Friday, the S&P 500 index delivered the 38th high-volatility move this year, with 38 daily moves greater than +/- 2% on the S&P 500 in just the past 3 months. These are more daily +/- 2% moves than the years 2012, 2013, 2014, 2016, 2017, and 2019 combined. If the second half of 2020 continues like the first half, we will have more record volatility days than 2008 during the financial crisis.

The returns highlighted in orange represent years where the S&P 500 has outperformed the Hedge Fund Index, and that was true again for 2019 YTD. The data are not available for 2020 yet, but we do know the Premium Portfolio is leading the benchmark S&P 500 through mid-year by +21.29%

The continued underperformance of the average hedge funds to the S&P 500 is having consequences on the hedge fund business. More hedge funds are liquidating than opening new funds, and both management and performance fees are being cut to retain investors.

Meanwhile, hedge fund managers keep cutting their fees. Of all funds active in 2019, the average management fee was 1.36%, down from 1.43% in 2015, while the average performance fee was 16.41%, versus 17.22%. Among North American funds launched in 2019, those averages were 1.20% and 14.25%, down sharply from 1.61% and 18.36% a decade ago.”

– MarketWatch

Conclusion

At the start of last year, I wrote a piece called “Funds And Fundamentals Breaking Down: What Are Your Best Alternatives For 2019?

In this article, I tried to anticipate what some of the best strategies would be for 2019 and again for 2020. I incorporated lessons learned from prior years and made additional enhancements to apply throughout the year. Some key observations continue through today:

  • Over-reliance on fundamental variables are taking traditional trading strategies to the woodshed.
  • Quants, algorithmic trading, external macro shocks and monetary policy intervention have disrupted the status quo.
  • Top Hedge Fund expert money managers are lagging the broader indexes and failing to find any discernible alpha in the markets.

Major effects are disrupting the marketplace, and it is very important to be sensitive to changes even if they seem to go against logic and preconceived investment ideas. Two of the strongest effects were once again the monetary policies of the Federal Reserve and record levels of corporate buybacks that are sustaining the market at levels many experts never imagined. Constant awareness of these broader market conditions is always very important to the success of individual sector and stock selections.

How this unfolds for the rest of 2020, I cannot say with any certainty. But I do know that these models provide the flexibility to make change as market conditions change. I will do my best to deliver good results into December!

All the very best in your trades,

JD Henning, PhD, MBA, CFE, CAMS

If you are looking for a great community to apply proven financial models with picks ranging from short term breakouts to long term value and forensic selections, please consider joining our 800+ outstanding members at Value & Momentum Breakouts

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.

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