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Trading System Spotlight: Compass S&P

June 15, 2009


We mentioned in last week’s newsletter how playing the contrarian, by investing in good programs currently in Drawdown, can be a way to get into good program “at a discount”.

Most investors don’t think like a contrarian – and instead are momentum players, usually wanting to get into the program which has done really well recently, not the one which has underperformed recently. And that is why most people do not have success investing in our opinion.

But for those of you out there who like to run against the crowd by zigging while others are zagging, the venerable Compass trading system may be worth a look. Now in its 10th year of being traded in actual client accounts, with an unbelievable 108 month history of actual client fills (the longest such record for a publicly available trading system we know of), the Compass system is currently offering up one of these contrarian entry points by being down a little over -21% thus far in 2009.

This month's system spotlight is on Compass:

Who is the Developer?

The Compass system was developed by Jack Telford of Mariner Trading in 1999 after 16 years of trading stocks and S&P 500 futures.

A computer software engineer since 1976, with degrees in business and computer science, Mr. Telford first found out about the futures markets when living in DC in 1986, working on a defense contract. As the story goes, Jack was in between sessions and headed to a bookstore right down the road from the White House to pass the time. He picked up an issue of Technical Analysis of Stocks & Commodities magazine, and was hooked, later saying: "The technical slants in there really opened my eyes to the possibilities of that type of investment."

Not believing in the Internet bubble, Jack set out to develop a trading system which was 100% mechanical in the late 90's. He based the trading logic solely on price and time, having witnessed the index markets volatility wreak havoc on many systems based on traditional technical indicators.

Mr. Telford has been a client of the Attain Capital partners for over 10 years; having traded Compass for his personal account before offering it to the public in January of 2000. Mr. Telford continues to trade his program alongside those investors who have leased the signals, maintaining an account at Attain Capital for such trading.

Jack resides in Cincinnati, Ohio with his two children, enjoying coaching his sons in golf, fishing, and hockey when not testing new trading systems and methods.

Mr. Telford has pleaded with us over the years to pass on his feelings that he is not your normal run-of-the mill system developer looking to make living selling programs. In Mr. Telford’s opinion, what makes the Compass system and its developer unique is that he wants to make a living from the profits of the Compass system. We have told him this is a dangerous way to think, as there are bound to be losing months, quarters, and even years - but he sincerely believes it, and has tried to design a system which can, on average, consistently make him a "monthly salary".

How Does it Work?

Compass is a mechanical day trading system designed to monitor stock index futures for buying and selling opportunities during each trading day. The system was developed specifically for the S&P 500 futures market, one of the most active and liquid stock index futures markets in the world.

Compass utilizes a completely different concept to day trade the stock index futures market by being completely dynamic and reactionary. The system is unique in the fact that it relies exclusively on price and time, and contains no technical indicators. By using this unique structure instead of indicators like moving averages, swing highs and lows, etc. Compass insures it does not have any 'preconceived' notions about the day's price action.

The system looks for and identifies a specific pattern in which a trend is established in the morning, has a shallow pullback during midday, and then reestablishes the trend in the afternoon. Once the midday pullback begins (if it does at all), the system immediately generates either a limit or market order in hopes of getting in line with the trend at better prices. The system then simply gets in, or waits for the market to pullback and fill its limit order. The limit order is a nice feature in that it can eliminate slippage on the entry.

Compass can also signal a "power trade", in which the overall strength or weakness of the market is deemed so strong (or weak) when looking at the market internals (Advancing Issues, Declining Issues, Up Volume and Down volume), the system looks to get in sooner.

If the system determines that the market is extremely weak or extremely strong and that the market will have a more shallow pullback, this different entry logic is used. Compass will enter the market up to an hour early utilizing a more shallow pullback level or enter without waiting for a pullback at all. The system utilizes this method to capture market conditions where the price continues in the same direction the entire day without a significant pullback.

Two other unique characteristics are the timing of the entry and exit orders. On the entries, the system filters out all market activity before 10:30 AM CST, never taking a trade before that time regardless of what the market is doing. This effectively filters out the wild swings often present within a few hours of the open as the market tries to digest the economic reports which are released at 7:30 CST and 9:30 CST.

On the exit side, trades are exited no later than 5 minutes before the end of the trading session. This effectively filters out the wild swings that are sometimes present on the close due to earnings releases, etc.; and avoids the dreaded market on close order (nicknamed "Murder on Close" by floor brokers).

The initial stop is set outside of a predetermined fibonacci based retracement level, but is never supposed to risk more than $1,750 from the entry price. [Disclaimer: The use of stop orders can not guarantee that and order will be filled at the desired price] On profitable positions, the stop can be trailed behind a profitable position to lock in profits. And the system will issue a sort of windfall profit target for each trade, usually about 20 points, or $5,000. The system generates a maximum of just one setup per day and only trades 12-15 days per month on average.

Attain Comments:

There is a lot to like about Compass, but the most impressive statistic has to be its 108 month actual fill track record. In an industry that at times relies too heavily on unrealistic hypothetical track records, here is a system that you can see the exact fills clients trading the system received going back over 9 years! This is the longest actual track record of any system we know of, and whatever you think of the system or performance - the fact that the system is still around after nearly a decade of trading has to impress you.

The downside to Compass, of course is that nasty drawdown we saw during 2006 and into the first part of 2007.  Not many investors even want to consider a program with a -82% DD. But if we examine that DD, and the two losing years Compass has had ('04 & '06) we see that they all occurred at the same time volatility was making historical lows. It had a 50% DD in the middle of '05 due to that low volatility also.

If one thing seems clear in the current market environment, it’s that volatility is here to stay for a while. The VIX has admittedly come way down, from 90 to 30, but it is still three times higher than it was in 2006 when it dipped below 10 several times. There is, of course, always the possibility that the system will match that past Max DD number of even go past it, but we don’t believe that will happen in this market environment.

We think the biggest threat to Compass is an extended period of very low volatility like we saw in 2004 through March of 2007, where the market simply doesn't move enough for the system to be very profitable. But that sure doesn’t seem to be in the cards right now. Quite the contrary, it seems we’re due for a spike in volatility in the second half of the year. Ask yourself whether the market can keep rallying 30% every three months (as it has from the March 09 lows). I for one think that is very unlikely, and expect volatility to be back on the rise when equities stop going up/up/up week after week. Should they re-test the March 09 lows, we could see volatility back to the 60-70 levels.

The good news is that Compass performed great during an increased volatility environment in 2000, 2001, 2002, and most recently 2008 (its best year ever). [past performance is not necessarily indicative of future results].

That big DD is still a worry of course, but here's another piece of good news - you don't have to come close to that DD number if you don't want to. You can set a stop trade point/line in the sand at any reasonable level below the current level.  You could set a stop trade point at losses for the program of -50%, for example, which is the max DD hit by Compass before the big 06/07 -82% DD. This -50% level is a logically sound level to put as your line in the sand for Compass.

And with the program currently sitting at -21% for the year, that -50% level gets a lot smaller. You now only have to risk from -21% to -50%, or just 30% on $30,000 – which equals $9,000. With the program having made over $40,000 last year, a risk of $9,000 to get involved seems quite reasonable in our opinion.

In the end, we believe in Compass and believe drawdowns such as the current one for Compass are a great time to get involved with the program. If you believe volatility is here to stay due to the continuing credit crisis, trillions of dollars in US debt, North Korea, and so on - Compass has shown that it can do well in times of higher volatility, and is definitely worth risking between $7,500 and $15,000 from the current levels in our opinion.

[Please note that Attain’s performance report on the Compass system is that of a ‘Hypothetical Model Account using Actual Client Fills’. The track record is compiled using the actual profit and loss of actual trades received by actual clients, but instead of generating the composite performance of all clients trading the system as a CTA would do, Attain takes the actual profit/loss received by the clients, on average, and on a single contract basis – then sums those profit and loss numbers per trade for each month, and then generates a percentage gain/loss for the model account by dividing that gain or loss by the developer recommended balance of $30,000. The model account is then reset to the $30,000 amount at the beginning of each month. The performance is tracked in this manner because the actual client percentage gains will vary a great deal based on the account’s starting balance, commission rates, length of participation in the program, and so on.]



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Feature | Week In Review: Commodity Rally fizzles, stocks next? | Chart of the Week


Trading activity during the past week still produced high volatility, but substantial week over week increases were lacking. Recent inflationary related activity seemed to ebb with trading focused more on supply/demand scenarios. Economic news was more fractured with reports leaning more to the negative, especially news for the housing sector that has been knocked off stride by the recent rally in bond yields. The headline news was from the Federal Reserve which indicated household net worth has fallen well over $1 trillion as of the end of March with the phenomena lasting for consecutive quarters. Stronger economic growth continued to emanate from Asia as China reported a rebound in industrial growth and retail sales in May.    News from Europe was again quiet, but many releases are scheduled for the upcoming week which could produce market moving results. Overall, the energy sector was the leading gainer of all sectors for the week as the weekly stocks report showed bigger draws than expected which produced strong a strong price increase for Crude Oil +5.26%.  The balance of the sector also ended firm with RBOB Gasoline +4.58% and Heating Oil +3.81. Natural Gas -0.28% continued to be dogged by a heavy supply situation.                   

Activity in the metals again ended in a mixed state as Gold and Silver continued to be victimized by the firm aura of the U.S. dollar which seemed to ease the inflationary buying the sector has seen recently. Most industrial metals were on the soft side, although the strong performance in Copper +3.79% continued with support stemming from another round of better economic news in China. For the week Silver was -3.31% followed by Gold -2.28%, Palladium -2.19% and Platinum -2.07%.  

The Commodity and Food sectors were mostly lower last week with grains ending mostly lower due to the USDA monthly release on Supply/Demand showing both corn and wheat stocks domestically and abroad in good standing. The report did show a continued trend of tight old crop soybean supplies which kept a firmer tone in place. The Livestock sector continued to fight heavy supplies and worries of lighter demand due to the last remnants of the swine flu debacle. Soft commodities also fell prey to higher supplies along with news of better growing conditions for new crops, although Cotton experienced positive returns from the USDA monthly data. Price increases for the week were seen in Cocoa +1.99%, Cotton +1.80%, Soybeans +1.63% and Live Cattle +0.55%. The balance of the complex finished with losses led by OJ -8.74% followed by Wheat -6.16%, Corn -4.19%, Coffee -3.21%, Lean Hogs -3.02% and Sugar -2.12%.

Activity in currency futures led to the British Pound advancing against the balance of the complex mostly due to news that the U.K. economy showed signs of life with expectations of inflation rising stronger than earlier predicted. This news also benefitted other currencies in Europe but no to the extent of the rally in the Pound. Recent Chinese rumbling to the U.S. that they were not happy with U.S. Dollar trading level seemed to subside, but the fact that they are major holders of U.S. debt should keep the feeling at the forefront in weeks to come. For the week the British Pound +1.64% led the rally followed by the Swiss Franc +0.61%, Euro Currency +0.35% and Japanese Yen +.30%. The Rate sector bounced back a bit with the 30-year Bonds +0.91% and the 10-year Notes +.87% on ideas that auction participants may back off after a strong advance in yields.       

Stock index futures ended the week in a mixed state as the broader indices eked out a small rally and the smaller caps falling due to a lack of economic headlines. The energy seen in the marketplace the past few months lost its momentum with most economic releases not on par with market expectations. Worries of the higher yielding fixed instruments also seemed to steal some of the investment spotlight with the recent rally in the debt marketplace. For the week only the S&P 500 futures +0.49% and Dow futures +0.38% held onto the rally. Losses were led by the Russell 2000 futures -1.13% followed by NASDAQ futures -0.55% and Mid-Cap 400 futures -0.14%.     

Managed Futures

The story so far this month for most CTAs has been the quick reversal of the recent uptrend in commodities and down trend in bonds. This has hurt those looking for those trends to continue (systematic multi-market managers) while helping those who don’t like to see markets run too far in either direction (option sellers).  Most investors ditched their counter-trend managers (and option sellers) last fall as that style was definitely out of favor, but the past few months have shown it may pay to have some exposure to both styles of trading (trend and counter trend).

As mentioned above, Multi Market managers with positive results thus far are few and far between for our actively tracked managers with only Clarke Capital Global Basic and Global Magnum ahead +0.72% and 0.30% respectively.  After several months of very little activity Clarke has been more active in the past 4-6 weeks – the above two programs are 100% systematic in nature and are looking for intermediate term trends to trigger new entries.

Other Multi Market estimates are as follows: APA Strategic Diversification -0.75%, APA Modified -2.25%, Dighton “no activity”, DMH -0.46%, Emil Van Essen -0.85%, Futures Truth MS4 -0.35%, Futures Truth SAM 101 -2.43%, Hoffman Asset -2.88%, Integrated Concentrated Program -0.56%, Lone Wolf -2.11%, Mesirow ABS Return -0.18%, Mesirow Low Vol -0.07%, and Robinson Langley -1.77%.

Short term stock index traders are also in the red so far this month with Paskewitz Asset -0.88% (short coming into the day today) and MSLO -0.42%.

Option trading mangers have been the beneficiaries of the trend reversal, with the top performing manager for the month thus far the FCI CPP program, which is ahead an estimated +3.85% so far in June.  CPP was down -5.69% in May and ahead +14.94% for the YTD (through May). 

Other option trading estimates for June are as follows: ACE Investment Strategists +0.57%, Cervino Diversified +0.58%, Cervino Diversified 2x +1.48%, Crescent Bay PSI -0.08%, Crescent Bay BVP -0.95%, FCI OSS +0.81%, and Raithel Investments +0.42%.

Agriculture and Grain activity has been limited to Rosetta Capital so far in June.  Unfortunately they have continued to struggle to find their footing and are down an estimated -5.25% thus far in June.

Trading Systems

System performance was mixed last week with the majority of the day trading systems finishing the week with losses while ¾ of the swing systems managed to stay above water. As a whole, the day trading systems active in foreign markets (Dax) outperformed those traded domestically.

Beginning with the swing systems for a change, Strategic SP took top honors up +$3,437.50 for the week on three closed out trades. Sister system Strategic ES was also up +$452.50 but did have one less trade than the SP system due to the fact that the signals are run on different contracts that have different minimum moves (.25 for ES vs .10 for SP). AG Mechwarrior ES had similar results to Strategic ES + $715.95 on two trades for the week. Finally, Waugh Swing ES lost -$492.50 in its debut at Attain. The program came into the week with a bearish position and was stopped out on Wednesday.

Moving on the day trading systems, the game ball went to ATB Welcome v2 Dax +1,555 € on two trades for the week. Rayo Plus Dax had just one trade for the week but made it count + 715 € on that particular trade. Rayo Plus 1815 Dax was much more active than its sister system, but only tallied to a lesser amount of 245€ for the week. Elsewhere, ATB TrendyBalance v1 Dax locked in +115 € on a single trade from Wednesday. Moving on, programs finishing on the wrong side of breakeven were BetaCon 4/1 ESX – 90 €, Waugh ERL -$882.40, Viper II ES -$952.55, Compass - $1,300 and Clipper ERL - $1,670.

Futures based investments are often complex and can carry the risk of substantial losses. They are intended for sophisticated investors and are not suitable for everyone. The ability to withstand losses and to adhere to a particular trading program in spite of trading losses are material points which can adversely affect investor returns.

Past performance is not necessarily indicative of future results. The performance data for the various Commodity Trading Advisor ("CTA") and Managed Forex programs listed above are compiled from various sources, including Barclay Hedge, Attain Capital Management, LLC's ("Attain") own estimates of performance based on account managed by advisors on its books, and reports directly from the advisors. These performance figures should not be relied on independent of the individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or not the performance includes proprietary results, and other important footnotes on the advisor's track record.

The dollar based performance data for the various trading systems listed above represent the actual profits and losses achieved on a single contract basis in client accounts, and are inclusive of a $50 per round turn commission ($30 per e-mini contracts). Except where noted, the gains/losses are for closed out trades. The actual percentage gains/losses experienced by investors will vary depending on many factors, including, but not limited to: starting account balances, market behavior, the duration and extent of investor's participation (whether or not all signals are taken) in the specified system and money management techniques. Because of this, actual percentage gains/losses experienced by investors may be materially different than the percentage gains/losses as presented on this website.

Please read carefully the CFTC required disclaimer regarding hypothetical results below.