Deep Dive on a Heavy Hitting Strategy

Howdy Partner

Despite the fact the financial world has been crumbling over the last week, I’m going to refrain from talking about the situation. I’m a wise enough person to recognize I’ve got nothing insightful to add, so lets stick to what I do know. Algorithms and topical Gifs.

Without Further ado, showcase time! I’m gonna preface this one with a warning, there are a couple of issues I have with this strategy. We can talk about those more later, and I’d love to hear some feedback on it over in the Discord Server!

So what strategy is it?

Battleship III

Battleship is a classic trend detecting and following strategy. Split up in to a series of manually weighted sections, it employs a series of similar but differing checks across incredibly diverse baskets of equities and indices. Scores huge points with me just off the naming scheme,

Crash Protection and Dip Buying

The first section is weighted to 10% of the total allocation. It consists of a black swan catcher (a bit of code tuned to profit or protect from potential crashes) and a “buy the dips on QQQ, but leverage it” section at the very top.

But for all the times when the market isn’t crashing and the Nasdaq isn’t sufficiently down, we have our first basket to pick from. This basket consists of every asset class on the market, Stocks, Bonds, Commodities, Gold, with Emerging Markets and 3x Leveraged Utilities companies thrown in for some added 🌶️spice.🌶️

Long Term SPY Trends

Next up we’ve got a section weighted at 40%, the largest single block in the strategy. We’ve got the same black swan catcher as the first section, repeated for emphasis. But the magic happens when the market isn’t dying. This one is a deep logic tree so I’m going to keep this short and sweet.

If SPY’s long term trend is more bullish than commodities, and SPY is especially bullish over a shorter timeframe, go long volatility at extreme highs or if SPY is up 4% on the day. If we aren’t at extreme highs and not up 4% on the day, just go leveraged long on SPY or QQQ.

If SPY is more bullish than commodities but isn’t especially bullish right now, select from a basket containing several bond ETF’s as well as emerging markets ETF’s.

If Commodities are more bullish than SPY, and are especially bullish right now, select from a basket of commodities ETF’s that range from Corn to Real Estate to Semiconductors.

If Commodities are not especially bullish right now, well, we’re probably in an inflationary environment so lets go in to Cash, Gold, Real Estate or Volatility. Whatever is the least volatile over the last 11 days.

Short Term Market trends

On to one of the shortest but most interesting bits of the strategy. Amounting to 20% of the total allocation, we’ve got black swan catcher number 3 followed up with an interest rate check! Turns out, if 1 Year bonds are falling faster than 1-3 Month bills, it usually signifies that the Fed is raising interest rates. This leads us into a basket of things that do well in high interest rate environments. Gold, Energy, Utilities, stuff like that.

If we aren’t in a rising rate/inflation environment, it goes into standard short term bull market checks of QQQ and SPY Moving Averages. If neither of those pass and it turns out we’re in a bear market, we go to an absolute monster of a sorting basket containing more commodity ETFs than I knew existed, some bond ETFs, and just about every major index following ETF that exists, with all flavors of leverage represented. The basket is sorted by the 60 Day cumulative return, and the 9 highest are bought. This is hands down my favorite part of the symphony, the sheer number of options represented is a beautiful sight.

Dip Buys and more trend following

The final section accounts for the remaining 30% of the allocation. You guessed it, we’re starting with the same Black Swan Catcher as the last 3 sections.

The trend following logic in this section is identical to the “Long Term SPY Trends” section, the difference lies in the choices made when commodities are bullish. The final section is much more focused, either in DBC when especially bullish on commodities or a rotating basket of emerging markets and bonds when less bullish.

So there we have it!

A slow, methodical, and hedged trend-following strategy. It is certainly not the most nimble strategy, but when it locks in to a trend it absolutely crushes it!

Up top I promised you downsides and issues, so lets lay those out. This symphony sports a maximum drawdown of a whopping 38.6% compared to SPY’s 33.72%. I do not have the stomach to handle that kind of drawdown.

A ton of the gains on paper for this one come from accurately catching the Covid Crash. To me, that doesn’t signal reliable performance. We could go in to all of the thoughts I have on the concept of overfitting and whether this is that or not, but we’re already over 1000 words so i’ll leave it as “probably, but maybe not.”

Now my questions for you I want you to ponder on before the next newsletter are these;
What would you do about those two issues?
Are they issues to you?
Do you think this Black Swan Catcher is overfit to Covid?

Lets leave it there, I’ll see you next week!

Please note that the information provided is for general informational purposes only and is not intended to be financial advice. The information provided is not a substitute for professional advice and should not be relied upon as such. Always consult a financial advisor before making any financial decisions. Additionally, The Hard Road staff and contributors may have a stake in the Securities, Cryptocurrencies, Platforms, and other assets that are mentioned in this article and others.