Increasing Capital Efficiency

Re-mixing my All-Weather Strategies

Background:

As many of you that have read in The All-Weather Trader, my best-selling book that hit the streets 14 months ago, I currently run 10 strategies using 5 time periods, 5 different indicators, in about 30 futures markets and 30 different sector ETFs using mathematical position sizing to control risk and volatility in my overall portfolio. Any normal day, I may have about 60 positions in the portfolio There’s a lot going on in there.

Stocks acting weak lately:

I’ve been closely monitoring my excess available funds in the accounts and notice that as some of the sector ETFs have sold off due to the recent stock market weakness, my excess available funds is increasing and is not being utilized. In other words the utilization of my capital is not as efficient as it might be.

Exposure versus Investment:

Many traders look for investment vehicles to trade. They want the story, the fundamentals, what the chart setups look like and what the momentum indicators are telling them. Me? I just want exposure to potential huge trends that come along from time to time in macro markets in order to produce the profits that I’ve enjoyed over the years in my overall portfolio. I’m retired from the money management industry these days and don’t wish to spend any more time on managing my portfolios than I have to. I personally think trading stocks would take more effort to trade them in the manner I would want to trade them.

ETFs versus futures:

Since I’ve been trading futures for roughly 45 years now going back to the pre-Globex days of runners and paper tickets in the pits, I am very comfortable with getting exposure to a widely diversified basket of return streams in energy, debt, currencies, metals, meats, grains, softs AND EQUITIES! Realizing that my various now upside positions in equity futures are providing me with the exposure with a lot less capital tied up in the portfolio has gotten me redesigning my All-Weather approach to be more futures oriented. I’m also realizing that several of my strategies are similar indicators and time periods, so rather than treating them as a separate strategy, I’m envisioning moving some strategies into other existing strategies, simply to make my afternoon run after the market close less effort and time spent.

My understanding (check with your CPA. I’m not a tax expert) is that futures gains/losses are taxed at 60% long-term capital rates and 40% short-term rates after getting marked to the market at the end of the tax year. ETFs are taxed at normal short-term capital rates unless your timing signal is long enough to push the trade into long-term status.

Wash sales in ETFs:

From Investopedia.com: “A wash sale is a transaction in which an investor sells or trades a security at a loss and purchases "a substantially similar one" 30 days before or 30 days after the sale.1 This is a rule enacted by the Internal Revenue Service (IRS) to prevent investors from using capital losses to their advantage at tax time.

The wash sale rule applies to stocks, contracts, options, and all other types of securities and trading.” My comment: It doesn’t apply to futures trades.

Since I do time my sector ETF strategy, there have been some instances of wash sales, not a great thing for my tax bill to the various governments.

Improving my All-Weather portfolio and capital efficiency:

I’ve sold off some of my 30 sector ETFs as they’ve hit stops along the way lately, so I have more cash than usual. Adding the ability to go long or short various stock indexes, including the MSCI EAFE Index in Europe, I realized that I no longer needed the hedge that I used to have as one of my strategies. I had used the ES futures contract to get downside exposure in the futures to offset the longer term holdings still long in the Sector ETF timing strategy. Before that, I used a short in the SPY ETF to put the hedge in place. Both were effective, but not as capital efficient.

I figured, to simplify, I could just go long/short the equity index futures to get the exposure to up or down, have a better tax rate, less positions to deal with and more capital efficiency. I am now in the process of putting that philosophy into action. My sector ETF timing is now down to only 6 positions long, I’ve added various stock index futures positions to the strategies outlined in the All-Weather Trader, and now I am now researching new strategies/markets I can add to increase the extreme diversification aspects of All-Weather trading. With all the freed up capital, I can easily add these new markets and strategies with room to spare.

This is my current thinking:

I will now have the following strategies with a general description:

1. Long term futures trend following: 36 markets, up from 26 markets

2. Short term 3 day futures: 24 markets up from 20 and a few more added as things settle down

3. Short term counter-trend trading: same 36 markets as number 1

4. Stock index trading: long/short 9 day indicators with NQs, adding RTYs to get smaller cap exposure

5. Crypto Timing: MBT and MET futures, 9 day indicators same as now

6. Options Credit spreads: Same as before, 1 week option credit spreads using index options, evaluating using options on futures for ease of trading and taxes.

7. Day Trading: 5 minute bars, very quick trend following from overbought/oversold conditions, only if I am stuck sitting at the desk. No changes here. (I made two trades worth about $3,000 using day trading while writing this “Thoughts”.)

I’m looking add more liquid markets and am now working on identifying those. The CME has extensive lists of both larger contracts, mini contracts and micro contracts for various sizes and purposed.

I’m looking at adding more markets to the 9-day time period for time diversification.

The hedge page at enjoytheride.world:

I am going to now use the $SPX instead the SPY ETF in the chart. It should be very close to the same. Of course I will no longer be doing these hedge trades due to having the downside exposure elsewhere, but will try to keep it reasonably updated around critical times. Each trader should create his/her own indicators and hedge strategies to be timely. I am not going to start running a newsletter or alert service in retirement. I show the chart as inspiration to traders. What you do with the inspiration is your responsibility. I may pick one of my other strategies that I use to inspire. We’ll see.

My long-term goal hasn’t changed at all:

My goals have remained the same. In my own portfolios I want to:

1. Be diversified by trading in a wide range of markets

2. Be diversified by trading over various time parameters

3. Be diversified by the math/logic/indicators that I use

4. Be rigorous with my position sizing initiating a trade

5. Be rigorous with my position sizing throughout the ongoing trade

6. Be efficient in the use of the portfolio’s capital

I retired from the money management industry and focus on improving return to risk over time. Your own objective might be and perhaps should be different from mine, since you have a unique situation that you have to deal with. Where you end up may be a different place than some of the conclusions I’ve come to in order to improve what I am doing with my portfolios, but hopefully this inspires thought and keeps all of you on the road to better ways of dealing with your own portfolios.

Along the road to improvement, make sure to Enjoy the Ride!