Is the current volatility good for Bond Systems?
December 3, 2007
The stock market is not the only place we've seen an increase in volatility in 2007. The bond markets have also seen their share of volatility increases due to the subprime mortgage mess / housing slump / credit crunch / liquidity crisis.
Since two Bear Stearns-managed hedge funds announced big losses and sold $4 Billion worth of assets to cover investor redemptions on June 20th, 2007 - we've seen 30 year bonds rally 11% in prices (when prices rise, rates go lower) and 10 year notes rally 9.7%. At the same time, the average true range of the benchmark 10 yr note futures moved from an average of 0.35% of the underlying price during the preceding 3 quarters to close to 0.60% recently (a 71% increase!!)
These markets are clearing becoming more volatile, and look to have finally broken out of a years long trend of lower volatility. Notice the trend line start to move up on the right side of the graphs below to levels not seen since late 2003.
Source - Attain Capital
While the verdict is still out on what the lasting effects of the sub-prime mortgage meltdown will do to global economies, one result of all of this we're seeing already is increased movement in interest rate futures (30 yr Bonds, 10 yr Notes, Euro Bunds, and the like)
Whether it be further surprise rate cuts and liquidity injections by the Fed, a large bank like Citigroup going under, the likelihood of the interest rate markets remaining volatile seems a good bet. Add to that the very real possibility of the Fed being caught between having to raise rates to fight inflation (record high energy prices) and having to lower rates to spur a flagging US Economy (record low home sales), and you can see the possibility for large swings in interest rate futures as markets try and price in both scenarios
Trading systems need movement to be successful, and this trend higher in bond market volatility should be a good thing for trading systems which operate on interest rate futures such as 30 yr Bonds, 10 year Notes, and their European counterpart the Euro Bund. But that begs the question - which systems trade interest rate futures.
"Bond" Systems
Mesa Notes - The Mesa Notes system utilizes the MESA cycle logic present in all of developer John Ehler's systems, and looks to capture intermediate term counter-trend moves which see prices revert to the mean after they are at a cyclic peak. Click here to View Performance
Jaws - The Jaws 60 operates on 60 minute bars (natural hours) for the day session only and actively looks for breakout trends in the intraday market, making it the shortest . The developer of the Jaws suite of systems is Australian company Midshipman Services, Pty. Ltd. and its owner David Imgraben. Click here to View Performance
Signum TY & eBL - Mr. Ryszard Krug of K-Partners in Poland developed the Signum program - which is a selective counter-trend system which uses dynamic entries, position sizing, and exits to capture intermediate term moves in the 10 year note futures and Euro Bund futures. Click here to View Performance
We believe each of these systems could fit well in a portfolio of CTAs or other trading systems to provide some diversification and gain exposure to the increasing volatility in the bond markets. But they look even better when considered as a sort of bond portfolio. The following custom portfolio report generated off of the Attain website. (Click here to run your own portfolios) shows a nice smoothing effect when combining these three strategies into a portfolio.
- Barbara Mueller
IMPORTANT RISK DISCLOSURE
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.
Feature | Week In Review | Chart of the Week | Top 5 CTAs | Top 5 Systems |
Feature | Week In Review | Chart of the Week | Top 5 CTAs | Top 5 Systems |
***Overview***
November was a tough month for the US Stock market as the credit crunch and high energy prices finally caught up with the stock market. Tech stocks and smallcaps were hit hardest with NASDAQ futures falling -7.01% and Russell 2000 futures dropping -7.56% for the month. The SP Midcap 400 which is another smallcap index was down -5.42% as well. Blue Chips weren't hit quite as hard although SP futures fell -4.58% and Dow Jones futures lost -3.69%.
The money that was flowing out of stocks seemed to be moving into US bonds which saw yields fall dramatically. Both US Bond futures (+4.05%) and US 10 year note futures (+3.59%) had big up months. (Remember: Prices move higher as yields go lower). In currency trading the US Dollar was down again albeit only slightly for the month. US Dollar Index futures fell -0.38% while Eurocurrecy futures (+0.92%), Swiss Franc futures (+2.09%) and Japanese Yen futures (+3.40%) all traded higher.
In commodity trading - the Energy, Metal, and Grain markets all had a very active months in November. Energy prices actually moved lower for the month despite flirting with the $100 level early on. Crude Oil futures (-5.14%), RBOB Gas futures (-4.58%) and Natural Gas futures (-15.68%) all finished in the red despite trading higher for most of the month. Heating Oil futures did finish higher however at +2.41%. Metals also moved lower with Gold (-1.67%), Silver (-3.24%), Copper (-3.24%) and Palladium (-6.87%) all moving slightly lower for the month. Meanwhile grains finished the month higher with Soybeans (+5.29%), Wheat (+6.05%), and Corn (+2.24%) all trading higher.
Finally other markets on the move include Cotton (-7.48%), Sugar (-2.30%), Coffee (+2.91%), Lean Hogs (+2.76%) and Live Cattle (-2.02%).
. ***Commodity Trading Advisors (CTAs)***
With November 2007 registering as one the most volatile months of trading in recent history(both in commodities and stock indices), we were pleased to see a majority of CTAs tracked in our recommended list end the month with positive returns.
Sitting atop the performance list was the CKP Lomax strategy which returned an estimated 12% in November and is ahead 13.5% for the YTD. CKP's returns did not come without controversy as the strategy first hit a new maximum drawdown or near 50% following the surge in energy, currency, and metals prices in the first week of Nov. As discussed in the past CKP is not for the faint hearted as their trading style of selling strangles on various commodity and currency markets can result in some steep open trade losses.
The most consistent program for the month was Ascendant Strategic 1 (S1) returned an estimated +7.6% for November following several impressive and well timed trades. The program was short calls coming into the month and once the markets found their bottom Ascendant deftly initiated several short put positions to capitalize on the heightened market volatility. You can read more about Ascendant in our newsletter from early November: http://www.attaincapital.com/alternatives/alt_nov1207.htm#Topic.
Elsewhere, the heightened market volatility was optimal for the bulk of index option selling CTAs who have enjoyed the ability to collect either more premium or premium from further out positions in comparison to years past due to the increased volatility levels. November was another great example with Zenith, Zephyr, Ace, Crescent Bay, Rathiel, Cervino, and Diamond all posting positive returns.
The lone option seller to take a hit was BC Capital, which gave back aprox 15% and returned to his August maximum drawdown. BC's strategy relies on time and the expectation that the markets have a natural bias toward the upside - as well know there was nothing natural about November and as a result BC was eventually stopped out of their positions in line with their risk parameters. We expect BC to make a full recovery from the current drawdown (i.e from August though October they were up aprox 10%) over the next 3-6 months.
Finally, the multi market strategies and spread traders ended the month relatively flat. Attain Portfolio Advisors hit a new equity high mid month only to give back profits following the rapid change in the stock index, bond, and metals positions over the last week or so of trading.
***Day & Swing Trading***
Volatility came roaring back in November as global stocks finally reflected some of the bad news surrounding the sub prime mortgage mess in the US. Turbulence in the equities spilled over into other markets, most notably in the bond markets giving systems that trade the treasuries ample opportunity to profit. (see topic of teh week above on bond systems)
Starting with bond systems, Signum TY was the top performer with gains of +$6,446.87. The program was holding long two contracts in the Ten Year Note and took off half the position mid-month after reaching its first profit objective. Signum EBL had more modest gains of +$2,921.68 after reaching its profit objective earlier in the month. Mesa Notes had another strong month +$1,750 after reversing several times but is taking a little heat on the current short trade. The Jaws programs had profitable months up +$1,256.25 for Jaws US 400 and +$806.25 for Jaws US 60 while down -$993.75 on the US 450 program.
Moving on to the day trading systems, Rayo Plus Dax was the top performer by a landslide with profits of +$11,105.81. RT Viper YM had an impressive month with profits of +$2,626.99 after trading nearly every day in November. Waugh eRL caught a lot of late afternoon moves and made +$1,209.98. BounceMOC eMD traded four times for gains of +$924.64 for the month. BounceMOC eRL wasn't as active as its eMD counterpart but made +$784.48 on one mid-month trade. BetaCon 4/1 ESX added +$741.98 on seven trades for the month. Compass SP lost -$187.50 for the month after taking a full stop-out on the last day of the month.
***Long Term***
Long term trading systems carried the momentum of October into November for the most part, although trading action continued to be light in comparison to the high volatility in many sectors of commodities. The battle of worries between inflation versus recession in the U.S. kept many markets on edge, but most long term trends remained intact.
The interest rate sector saw prices hit new 2-year highs on more fall out from the sub-prime market. Aberration is currently long Ten-year Notes with a gain of +$4564.87 (open trade), long Euro-Bund with a loss of -560.00EU (open trade).
The U.S. Dollar continued its trek lower in Nov., again scoring historic price levels versus several major foreign currencies with the rally in inflation sensitive commodities being one of the main causes. Aberration is currently short the U.S. Dollar Index with a gain of +$3080.00 (open trade), while Relativity exited its short U.S. Dollar Index for +$3640.00 and long Aussie Dollar for -$800.00.
In grains, Soybeans scored new 3+year highs propelled by ideas of further tightening in supplies and worries that without ideal growing conditions in the Southern Hemisphere the supply could be nearing dangerous levels. Wheat and corn followed the tune, although wheat accelerated hard late month on news that dry weather has left the crop conditions flirting with an 8 year low rating. Aberration is currently long Bean Oil with a gain of +$3652.00 (open trade) and long Corn making $187.50 (open trade), while having exited short Corn losing -$562.50. Relativity is currently long Canola making +192.00CD (open trade), long TGE Soybeans making +9000.00JY (open trade); and exited a Long Soymeal position for gains of +$3110.00.
Gains in grain coupled with higher production totals in beef, pork, and poultry sparked pressure in most livestock however the lean hogs found late month support on rumors of more Chinese demand. Aberration is currently short Live Cattle making +$890.00 (open trade) while Relativity exited a short Lean Hog position for +$5100.00.
IMPORTANT RISK DISCLOSURE
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.
Feature | Week In Review | Chart of the Week | Top 5 CTAs | Top 5 Systems |
Past Performance is Not Necessarily Indicative of Future Results.
| Rank | Program Name | 12 month Return | 12 month Drawdown | Min Investment (k) |
| 1 | Ascendant Asset Advisors, Inc. Strategic1 Options | 94.83% | 2.66% | $500 |
| 2 | K 3 Forex Program | 39.28% | 6.10% | $5 |
| 3 | Vision Capital Management, LLC Global Futures | 49.14% | 16.46% | $250 |
| 4 | Attain Portfolio Advisors - Strategic Diversification Program | 26.61% | 6.26% | $1,000 |
Figures listed are as of 12/03/2007.
IMPORTANT RISK DISCLOSURE
The rankings above are the top ranked CTAs offered at Attain over the past 12 months using a risk adjusted ratio which equals the period return divided by the period DD.
Investments in CTAs can be subject to substantial charges for management and advisory fees. The % returns in the CTA table above include all such fees, but it may be necessary for those accounts that are subject to these charges to make substantial trading profits in the future to avoid depletion or exhaustion of their assets.
The regulations of the Commodity Futures Trading Commission (CFTC) require that prospective clients of a CTA receive a disclosure document when they are solicited to enter into an agreement whereby the CTA will direct or guide the client's commodity interest trading and that certain risk factors be highlighted. The disclosure document contains a complete description of the principal risk factors and each fee to be charged to your account by the Commodity Trading Advisor (CTA). This document is readily accessible at this site using the Disclosure Document link at the Attain website.
Feature | Week In Review | Chart of the Week | Top 5 CTAs | Top 5 Systems |
Hypothetical Model Accounts using Computer Generated and Actual Client Fills.
| Rank | System Name | 90 Day Return | Return in Dollars | 90 Day Drawdown | DD in Dollars | Min Investment (k) |
| 1 | Bounce ERL | 34.92% | $3,492.48 | 7.00% | $700.00 | $10 |
| 2 | Ping T ES | 62.31% | $9,346.68 | 13.40% | $2,010.00 | $15 |
| 3 | Bounce EMD | 26.33% | $2,632.64 | 7.15% | $715.44 | $10 |
| 4 | RT-Viper YM | 28.59% | $2,859.20 | 9.91% | $991.24 | $10 |
| 5 | Signum US | 10.30% | $5,150.00 | 4.55% | $2,275.00 | $50 |
Figures listed are as of 12/03/2007.
IMPORTANT RISK DISCLOSURE
The rankings above are the top ranked Trading Systems offered at Attain over the past 90 days using a risk adjusted ratio which equals the period return divided by the period DD.
The % returns in the trading system table above are hypothetical in that they represent returns in a model account. The model account rises or falls by the exact single contract profit and loss achieved by clients trading actual money pursuant to the listed system's trading signals on the appropriate dates, or if no actual client profit or loss available - by the hypothetical single contract profit and loss of trades generated by the system's trading signals over the test period. The hypothetical model account begins with the initial capital level listed, and is reset to that amount each month. The % returns reflect inclusion of commissions, fees, and the cost of the system. Commission and fee cost = # of monthly trades * $50.00 ($30 for eminis). The monthly cost of the system is subtracted from the net profit/loss prior to calculating the % return. For systems with one time purchase costs, the monthly cost is calculated by dividing the purchase cost by the number of months in the reporting period.
HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN; IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS AND THE ACTUAL RESULTS SUBSEQUENTLY ACHIEVED BY ANY PARTICULAR TRADING PROGRAM. ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RESULTS IS THAT THEY ARE GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT. IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NO HYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK OF ACTUAL TRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSES OR TO ADHERE TO A PARTICULAR TRADING PROGRAM IN SPITE OF TRADING LOSSES ARE MATERIAL POINTS WHICH CAN ALSO ADVERSELY AFFECT ACTUAL TRADING RESULTS. THERE ARE NUMEROUS OTHER FACTORS RELATED TO THE MARKETS IN GENERAL OR TO THE IMPLEMENTATION OF ANY SPECIFIC TRADING PROGRAM WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION OF HYPOTHETICAL PERFORMANCE RESULTS AND ALL WHICH CAN ADVERSELY AFFECT TRADING RESULTS.
THESE PERFORMANCE TABLES AND RESULTS ARE HYPOTHETICAL IN NATURE AND DO NOT REPRESENT TRADING IN ACTUAL ACCOUNTS.