QuantDesk® Machine Learning Forecast
for the Week of March 21
Analysis
A fifth consecutive gain for the market and for oil marked the major indexes in the green for the first time in 2016. Tiebreaker and BlackDog participated in the rally gaining 1.01% and 2.4%, respectively. On a year-to-date basis, both Tiebreaker and BlackDog continue to outperform their respective benchmarks.
The table below delineates a YTD comparison between the two strategies we cover in this newsletter (BlackDog and Tiebreaker) and the two ETFs representing the major US indexes (the DOW and the S&P).
Image 1: Last week’s changes and year-to-date gains/losses.
Past performance is no guarantee of future gains.
WaveRider, Lucena’s Sector Rotation Strategy
WaveRider is Lucena’s proprietary sector rotation strategy. It relies on Lucena’s machine-learning forecaster to anticipate price moves of individual ETFs representing market sectors and fixed income instruments. It then applies Mean Variance Optimization (MVO) to optimally allocate its assets for maximum risk-adjusted return (Sharpe).
WaveRider assumes that there is a clear seasonality in the flow of funds between the major US industry sectors, REITs and fixed income. In back testing, WaveRider has outperformed the S&P 500 each year for the last 10 years. The fund reassesses its positions monthly or upon detection of a major shift in investor’s mood or risk appetite. WaveRider is able to re-align its exposure to ETFs representing certain sectors or fixed income based on market momentum or market volatility.
In light of the recent rally and ahead of the upcoming earrings season, many investors are evaluating whether its time to reposition their portfolios for growth. Many believe that the recessionary risks which dominated the headlines earlier in the year have dissipated. Often, WaveRider can provide some guidance as to the anticipated flow of funds between the main nine sectors, REITs and treasuries.
The image below represents the outcome of rebalancing WaveRider as of Friday’s close for the upcoming month.
Image 2: Optimizing WaveRider for maximum Sharpe as of March 18close prices. Blue line represents the current portfolio before optimization and the Orange line represents the portfolio with the proposed allocations.
Interestingly, the Optimizer is not convinced that we are home free quite yet, as it has assumed a rather conservative stand by allocating a large chunk of its assets towards SHW, a short term treasury bond ETF. WaveRider’s conservative allocations into US treasuries and consumer staples. (See below.)
Image 3: WaveRider’s optimization top positions. As can be seen, the optimizer favors short-term treasury bonds. A rather conservative stands.
When looking at the other side of the spectrum, the optimizer recommends to underweight financials and energy.
Image 4: WaveRider’s optimization bottom positions. As can be seen, the optimizer underweights Energy and Financials.
We will continue to monitor WaveRider’s performance and report if it indeed was able to accurately anticipate the above market trends.
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Tiebreaker: Lucena’s Active Long/Short US Equities Strategy:
Tiebreaker: Model portfolio performance compared to SPY from 9/1/2014 to 3/18/2016. Past performance is no guarantee of future returns.
BlackDog, Lucena’s Tactical Asset Allocation Strategy:
BlackDog: Model portfolio performance compared to the SPY from 4/1/2014 to 3/18/2016. Past performance is no guarantee of future returns.
Appendix
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.
Tiebreaker:
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, Optimizer and Hedger. Tiebreaker splits its cash evenly between its core and hedge holdings, and its hedge positions consist of long and short equities. Tiebreaker has been able to successfully avoid major market drawdowns while still taking full advantage of subsequent run-ups. The main factor that has enabled 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.
BlackDog:
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).
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.
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.
Specifically:
- 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: [email protected] 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 QHEDGE - Hedger
APPS QEVENT - Event Analyzer
On The Web:
quantdesk.lucenaresearch.com
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.