QuantDesk® Machine Learning Forecast

for the Week of August 31


Uncharacteristic volatility dominated all market regimes last week. Early in the week, all major indexes sank into correction territory before recovering and crossing back over the 10% peek-to-trough thresholds by Friday’s close. Still, most indexes remain negative for the year. The VIX (the Chicago Board Options Exchange, or CBOE, volatility index) spiked to 53 on Monday and dropped back to 26 on Friday, still well above the levels we have been accustomed to in recent years. The US 10-year treasury dropped to 1.9% on Monday before rebounding to settle at 2.18% on Friday. Crude oil experienced an exceptionally volatile week dropping almost to $38 per barrel on Monday before spiking back to close the week above $45 per barrel.

Many attribute these wild moves to a few dominant institutional investors, initiating large transactions stemming primarily from intra-day technical conditions. Further, many investors who extended their buying power by leveraging their account margins exacerbated volatility when they were forced to liquidate positions in order to meet margin call requirements. We are entering a period of uncertainty where, in spite of positive developments in the US, volatility persists due to overseas weakness and the Federal Reserve’s looming interest rate hike.

The fundamental factors that initiated the selloff remain. To name a few:

  • Asset prices remain high as measured by the S&P’s average PE ratio of 20.04 (well above the historical median of 15.64.)
  • Investment accounts are still dangerously leveraged.
  • China’s economy, the world’s 2nd largest, is slowing with major structural problems coupled with relentless government intervention.
  • A currency war is still underway, forcing emerging markets to devalue their currency in order to stay competitive, putting further pressure on US commodity prices.

At Lucena, Tiebreaker, our market neutral portfolio, continues to exhibit strength as it avoided the market’s volatility to end the week within striking distance of its all-time-high. On the other hand, BlackDog, Lucena’s tactical asset allocation portfolio, could not avoid the broad market’s gyration and suffered a drop of 1.62%. BlackDog remains sensitive to the current transitional Fed policy period, with pressure on both its fixed income and equity holdings.

Image 1: Last week’s change and Year to date gains.

For those of you unfamiliar with BlackDog and Tiebreaker, here is a brief overview:
BlackDog and Tiebreaker are two out of an assortment of model strategies that we deploy for our clients. Our team of quants is constantly on the hunt for innovative investment ideas. Lucena’s model portfolios are a byproduct of some of our best research, packaged into consumable model-portfolios. The performance stats and charts presented here are a reflection of live portfolios tracked on our platform, QuantDesk®. Actual performance of our clients’ portfolios may vary as it is subject to the manager’s discretionary implementation. We will be happy to facilitate an introduction to one of our clients for those of you interested in reviewing live brokerage accounts that track our model portfolios.

BlackDog is a tactical asset allocation strategy that utilizes highly liquid ETFs of large cap and fixed income instruments. The portfolio is adjusted approximately once per month based on Lucena’s Optimizer in conjunction with Lucena’s macroeconomic ensemble voting model. Due to BlackDog’s low volatility (half the market in backtesting) we leveraged it 2X. By exposing twice its original cash assets, we take full advantage of its potential returns while maintaining market-relative low volatility and risk. As evidenced by the chart below, BlackDog 2X is substantially ahead of its benchmark (S&P 500).

BlackDog: Model portfolio performance compared to the S&P 500 from 4/1/2014 to 8/28/2015.
Past performance is no guarantee of future returns.

Tiebreaker is an actively managed market-neutral long/short equity strategy. It invests in equities from the S&P 500 and Russell 1000 and is rebalanced weekly using Lucena’s Forecaster and Optimizer. Tiebreaker splits its cash 50/50 between its core and hedge holdings, and its hedge positions consist of long and short equities identified by QuantDesk® Hedge Finder. Tiebreaker has been able to successfully avoid major market drawdowns while still taking full advantage of subsequent run-ups. The main factor that enables Tiebreaker to perform so well is its ability to adjust its long/short exposure based on idiosyncratic volatility and risk. Lucena’s Hedge Finder is primarily responsible for driving this long/short exposure tilt.

Tiebreaker: Model portfolio performance compared to S&P 500 and the Vanguard Market Neutral Institution fund VMNIX from 9/1/2014 to 8/28/2015.
Past performance is no guarantee of future returns.

I designed, backtested and deployed Tiebreaker utilizing QuantDesk® exclusively. This can serve as an example of how a portfolio manager can take full advantage of Lucena’s technology.

Lucena is coming to a city near you!

Dr. Tucker Balch and I will be traveling to San Francisco in early September and Chicago in mid September. If you are or happen to be in San Francisco and Chicago and would like to meet us, please contact us at info@lucenaresearch.com.

In the context of big data analysis and the explosion of technical, fundamental and other predictive data sources, how can one ascertain which indicators are most predictive for a given time and market conditions?

A Genetic Algorithm (GA) is a type of Machine Learning (ML) algorithm inspired by the theory of evolution. Dr. Tucker Balch will introduce approaches to the use of GAs to build successful stock screens for trading and investing. The presentation will include example strategies utilizing GAs and other ML techniques developed at Lucena Research. Tucker will also talk about some of the challenges for ML in trading and lessons learned.

[No prior knowledge of Machine Learning (ML) or Genetic Algorithms (GAs) is assumed. The presentation is appropriate for those who want to learn about how ML is affecting finance and trading.]


Wednesday, September 9, 2015

12:00 PM – 1:15 PM PDT

Tucker BalchTucker Balch, Ph.D. is a former fighter pilot and now professor of Interactive Computing at Georgia Tech, and Chief Scientist of Lucena Research. His online course “Computational Finance, Part I” has been taken by more than 170,000 students worldwide. At Georgia Tech he teaches courses in Artificial Intelligence and Finance. Balch has published over 120 research publications related to Robotics and Machine Learning. His work has been covered by the Wall Street Journal, Institutional Investor, CNN and the New York Times. His graduated students work at Goldman Sachs, Morgan Stanley, Citadel, AQR, and Yahoo! Finance.

University of San Francisco
Rooms 154-156
2130 Fulton St
San Francisco, CA 94117

Registration is free for members and non-members.

This chapter meeting qualifies for 3 Continuing Education (CE) credits.

To view the full invitation, visit the following link: Use of Genetic Algorithms to find Effective Stock Screens

In the past year, we covered QuantDesk’s Forecaster, Back-tester, Optimizer, Hedger and our Event Study. In future briefings, we will keep you up-to-date on how our live portfolios are executing. We will also showcase new technologies and capabilities that we intend to deploy and make available through our premium strategies and QuantDesk® our flagship cloud-based software.
My hope is that those of you who will be following us closely will gain a good understanding of Machine Learning techniques in statistical forecasting and will gain expertise in our suite of offerings and services.


  • Forecaster – Pattern recognition price prediction
  • Optimizer – Portfolio allocation based on risk profile
  • Hedger – Hedge positions to reduce volatility and maximize risk adjusted return
  • Event Analyzer – Identify predictable behavior following a meaningful event
  • Back Tester – Assess an investment strategy through a historical test drive before risking capital

Your comments and questions are important to us and help to drive the content of this weekly briefing. I encourage you to continue to send us your feedback, your portfolios for analysis, or any questions you wish for us to showcase in future briefings.
Send your emails to: info@lucenaresearch.com and we will do our best to address each email received.

Please remember: This sample portfolio and the content delivered in this newsletter are for educational purposes only and NOT as the basis for one’s investment strategy. Beyond discounting market impact and not counting transaction costs, there are additional factors that can impact success. Hence, additional professional due diligence and investors’ insights should be considered prior to risking capital.

For those of you who are interested in the spreadsheet with all historical forecasts and results, please email me directly and I will gladly send you the data.

If you have any questions or comments on the above, please do not hesitate to email me directly.

Have a great week!

To conduct your own research on QuantDesk® please use the following links.

On Bloomberg:
APPS QFORE – Forecaster
APPS QOPTIM – Optimizer
APPS QEVENT – Event Analyzer
On The Web:

About Lucena Research

Lucena Research brings elite technology to hedge funds, investment professionals and wealth advisors. Our Artificial Intelligence decision support technology enables investment professionals to find market opportunities and to reduce risk in their portfolio.

We employ Machine Learning technology to help our customers exploit market opportunities with precision and scientifically validate their investment strategies before risking capital.

Disclaimer Pertaining to Content Delivered & Investment Advice

This information has been prepared by Lucena Research Inc. and is intended for informational purposes only. This information should not be construed as investment, legal and/or tax advice. Additionally, this content is not intended as an offer to sell or a solicitation of any investment product or service.

Please note: Lucena is a technology company and not a certified investment advisor. Do not take the opinions expressed explicitly or implicitly in this communication as investment advice. The opinions expressed are of the author and are based on statistical forecasting based on historical data analysis. Past performance does not guarantee future success. In addition, the assumptions and the historical data based on which an opinion is made could be faulty. All results and analyses expressed are hypothetical and are NOT guaranteed. All Trading involves substantial risk. Leverage Trading has large potential reward but also large potential risk. Never trade with money you cannot afford to lose. If you are neither a registered nor a certified investment professional this information is not intended for you. Please consult a registered or a certified investment advisor before risking any capital.