Note: All market analysis content published on ETFOptimize reflects our interpretation of the signals from our proprietary indicators and other measures. However, you shouldn't use this content for trading signals – but preferably, only to assist in your understanding of current market conditions. All ETFOptimize Strategy holdings are determined solely by the proprietary investment algorithms used in our systems, without the influence of discretionary judgment. The ETFOptimize Strategies provide you with an investment system that needs no additional outside input, and we recommend that subscribers follow the trades of their systematic model to the letter.
With about five sessions left in this year, this week we are going to summarize the stock market's performance for 2019, take a look at how our strategies performed compared to the market. We think you'll be amazed at how robust and consistent our models were in 2019!
Summary of Market Week Ending Friday, December 20
As shown by the list below, all of the major market indices were up last Friday over the prior week's close.
Index Performance – Week of Dec. 16 to Dec. 20
Dow Industrials (DIA): +0.83% to 284.46
S&P 500 (SPY): +1.57% to 320.73
Nasdaq (QQQ): +2.18% to 211.71
Russell 2000 (IWM): +1.99% to 165.97
Last week the Dow (DIA), S&P 500 (SPY), and NASDAQ (QQQ) indices all set records for yet another consecutive week. The only no-show to the party was the Russell 2000 small-cap index, which remains lower than its August 2018 high. While the small-cap ETF (IWM) did set another new 52-week high at 165.97, it remains 2.41% below its all-time high (ATH) at 170.07. However, with the index making weekly gains in 2% chunks – as it did last week – we might see that gap closed and the prior high overcome very soon.
Chart 1 below shows a daily chart for the S&P 500 Index for the last 12 months. The S&P 500 Index has gained 28.50% in 2019, since the market close on December 31, 2018.
Chart 1: The S&P 500 scored an epic year in 2019, with a gain of 28.5% – the best performance in six years. It still might overcome the previous record set in 2013.
Will the Laws of Physics Carry Prices Even Higher?
As it stands at the close of the market last week, 2019 was the best year for the S&P 500 in six years – with a gain of 28.5% for the S&P 500 Index, as measured from the market close on December 31, 2018. However, if the rally continues and carries large-cap stocks a couple of more percentage points higher, it would be the best year since 1997 – 22 years ago – when the benchmark scored a return of 31.01%. The closer record would require the S&P 500 to beat the return for 2013 at 29.60% – just 1.1% more than this year's gain.
There are still about five market sessions remaining in this holiday-shortened year, with Christmas Eve being a half-session on the exchanges and Christmas being closed, of course, and four additional market sessions before January 1, 2020. At the pace it has been going, and with the historically light volume on the exchanges, attaining this record is certainly a possibility – although there are no clear reasons what the catalyst would be to achieve this record – other than the fundamental laws of physics.
By invoking physics, I am referencing Newton's First Law of Motion in classical mechanics – i.e., "A body in motion will remain in motion until acted on by an equal or opposite force."
While you might argue that stocks do not hold physical mass and the laws of motion do not apply to equities, it would be difficult to deny the billions of dollars that change hands each day based on Trend Trading or Momentum Trading – words that describe Newton's First Law as applied to investment assets. The case can also be made that there is an analogy to mass based on the number of trade agreements – i.e., the volume of transactions – that occur for an asset in any given period.
If we accept that comparison, no investor can deny the sheer mass of money that has changed hands in the last year in the stock market– with demand primarily in one direction alone: higher. With about five sessions remaining, the S&P 500 Index gained 30.05% if measured from the open on January 2 or 28.50% if measured from the December 31, 2018 close.
It is certainly possible that the two records mentioned above might fall before the close of trading on December 31 – giving the S&P 500 a return of more than 31% for 2019. However, there are two approaches that (in real-time) trounced the S&P 500's return this year – by a factor of more than double for one – and more than triple for another!
Read on to learn about them...
Sector Performance – Last Week
Best Sector: Communications Services (XLC) at +1.60%
Worst Sector: Financials (XLF) at -0.45%
Chart 2 below shows individual sector performance for the week of December 16-20 for the 11 SPDR ETFs that make up the S&P 500. We can see from this chart that nine of the 11 sectors moved higher for the week, with the Communication Services Sector as the top performer – appreciating 1.60%, followed by the Real Estate Sector at 0.95%, and the Technology Sector at 0.73%. Financials were the weakest group of stocks with a loss of -0.45%, followed by Industrials at -0.28%.
Chart 2: S&P 500 Sector performance for December 16-20 features the Financial sector (XLF) losing -0.45% and Technology (XLK) performing best at +1.60%.
Chart 3 below shows that sector performance for the S&P 500 for 2019 was exceptionally robust, with all 11 sectors gaining ground. The Technology Sector led the S&P 500 higher with a phenomenal appreciation of 48.20% since December 31, 2018. The next biggest gainers were Communication Services (31.5%), Financials (30.78%), Industrials (28.4%), Consumer Discretionary (27.08%), Consumer Staples (26.64%), and Real Estate (25.88%).
Chart 3: S&P 500 Sector performance for 2019 was exceptionally robust, with all 11 sectors scoring big – led by the Technology Sector with a gain of 48.20%.
The worst performer on the year remained the beaten-up Energy Sector, which still gained 9.81% in 2019 – an accession that may have been enough for Energy to lead the parade in any typical year (the Energy Sector lost -19.54% in 2018).
Phenomenal Performance from These Two ETFOptimize Strategies
Even with a record-setting year in 2019, the S&P 500 couldn't come close to matching the performance of the two top ETFOptimize strategies – our
1) Adaptive Equity+ (2 ETF) Rotation Strategy, or our
2)Optimal Equity/Defensive (4 ETF) Strategy.
These two strategies produced a real-time Annualized Returnof 73.51% and 66.01% in 2019.
Chart 4 below shows a chart of our Adaptive Equity+ (2 ETF) Rotation Strategy performance since the start of 2019. This model has a total return of 70.55% this year, which our software calculates to an Annualized Return of 73.51%. The chart shows this return as compared to the S&P 500 ETF (SPY), which has gained about 30% for 2019. Therefore, the Adaptive Equity+ (2 ETF) model outperforms by 235% (2.35-times) the excellent return of the S&P 500 ETF in 2019.
Chart 4: Our Adaptive Equity+ (2 ETF) Strategy has gained 70.55% this year – 2.35-times the record-setting return of the S&P 500 – and an Annualized Return of 73.51%.
Are you aware of any other approaches that more than doubled the S&P 500 return in 2019? We know of one that TRIPLED it – so please continue reading. But first, here's another of our strategies that DOUBLED the S&P 500 Return:
Double the S&P 500 Return (again)
A conservative approach with a return of 2019 performance of 63.4%, or 66.01% Annualized, our Optimal Equity/Defensive (4 ETF) Strategy (below) produces only slightly less than the Equity+ model discussed above – and it provided double (222% or 2.22-times) the return of the S&P 500 in 2019! This model combines two Equity-based ETFs and two Fixed Income or Cash-Proxy-based ETFs, in a 70%-30% ratio, respectively, to produce a very steady and consistent performance year-after-year (77 of 77 consecutive profitable years). Our Fixed Income (2-ETF) Component produced a return of about 18.3% for 2019 – which is pretty amazing in itself for a defensive component in a bull-market year.
Chart 5 below shows the performance of our Optimal Equity/Defensive (4-ETF) Combo Strategy for 2019, producing a 63.4% Total Return – which is a 66.01% Annualized Return – for 2019. Maximum Drawdown (MDD) was only -6.9%.
Chart 5: Our Optimal Equity/Defensive (4 ETF) Combo Strategy has gained 63.4% in 2019 – more than double (2.22-times) the return of the S&P 500 in 2019.
TRIPLE the S&P 500 Return
Chart 6 below shows a chart we have never presented in the past. This chart shows our Equity++ Component, which contributes half of the positions and 70% of the weighting to our Optimal Equity/Defensive (4 ETF) Strategy (above). This 2-ETF Component is not available as a stand-alone model.
However, we wanted you to know just how outstanding the performance of the Equity++ Component of this model has been this year. (Note: The two Equity ETFs in this model should be different from the two Equity ETFs in the Equity+ Strategy the vast majority of the time. There may be an occasional overlap during times when the market has narrowed, but it is not a common occurrence.)
With a 91.84% Total Return YTD – or an Annualized Return of 95.94% – this model outperformed the S&P 500 by 3.37-times (337%). While not available as a stand-alone model, you can subscribe to the Optimal Equity/Defensive (4 ETF) Combo Strategy and break out the Equity Component ETFs if you would like to attain this performance going forward.
Chart 6: This chart shows our Equity++ Component for 2019. Contributing 70% of our 4-ETF Combo model, it produced an Annualized Return of 95.94% this year.
What's Coming in 2020
1) Our S&P 500 models (S&P 500 Bull/Bear Strategy and S&P 500 Persistent Profits Strategy) will soon be receiving significant revisions that should bring them into line, on a performance basis, with the two models presented above. We are planning to introduce these revised strategies on January 1, 2020.
2) Our highly demanded S&P 500 Conservative Strategy will become available as a stand-alone subscription at a low cost. We will conclude its availability as a 90-day Free Demo only.
3) All strategies will become available with two-week free trials that will convert to paid subscriptions if the investor chooses to continue.
4) We will be introducing additional New Strategies in the categories of US Sector Rotation, International Sector Rotation, and US Asset Allocation/ International Asset Allocation. We are also considering the introduction of additional models that have been running many years on an individual basis for a limited number of professional investors, but we are not ready to announce them just yet. We must first take the last steps in negotiating a satisfactory agreement.
Economic Calendar
With a holiday reducing the number of days the market will be open in the next week (to 3.5), the Economic Calendar is relatively light. This table shows the scheduled announcements for this week:
Don't Try to 'Improve' on Your Strategy's Decisions!
Overriding your model's recommendations with discretionary judgments or "waiting for a dip" is a well-worn path that eliminates the many benefits you receive from a quantitative investment model. Over time, doing this will guarantee that your results return to the average for all discretionary investors – about 2.6% per year – compared to the 40% return for all our models and 77% average AR in 2019 for the top-two strategies discussed above.
Please stick with your model's recommendations! Collectively, the ETFOptimize quantitative investment strategies have produced 77 of 77 consecutive winning years since inception. By over-riding your model's recommendations, you negate all the positive benefits that accrue to you from a systematic investment method. You reintroduce conscious and subsconscious biases and emotions – the very contributers to investor's and money manager's rotten performance over time that you were probably trying to eliminate when you subscribed. Don't do that!
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