Seeking Alpha

The Quest For A Perpetual Profit Portfolio

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Includes: GDX, GLD
by: Paul Wong
Paul Wong
Oil & gas, long/short equity, medium-term horizon
Summary

The odds for consistent profits improve if a portfolio contains uptrend assets only.

Gold and miners can be instrumental for investment gains in the coming years.

Quantifying the changes of price and momentum can support investment decisions.

“To raise new questions, new possibilities, to regard old problems from a new angle, requires creative imagination and marks real advance in science.” Albert Einstein

Introduction

Achieving perpetual profit in the financial markets is a vital quest for investors. This article serves to answer this question from the ground up. The idea is to construct a new pathway of diagrams and charts that leads to consistent profits. The steps are to identify the candidates for the selection list, and then to use new analytical tools to provide better odds for gains.

The world is facing challenging times. The main cause of the financial imbalances is total debt, which elevates and supports financial asset prices at dangerous levels. The consensus among the global authorities is to keep interest rates artificially low by enhanced money printing. Some of the inconceivable policies such as helicopter money, debt jubilee, and negative interest rates are becoming realities. The dawn of this new era calls for new thoughts in financial investment.

Many of the old ways of Wall Street do not function well anymore. In fact, the increase of the Fed’s balance sheet by 70% in nine months as compare to the past one hundred years says it all; this time is incredibly extraordinary. With record fiscal deficits and dismal economies, the Fed’s wish to keep asset prices from falling will be tested. It is best to have a new mental attitude with the starting point of September 2019, which marked the end of quantitative tightening towards easing. The shift requires new approaches to value financial assets prudently.

My previous articles only addressed elemental rotations among the four major asset classes, the US dollar, long-term treasury bonds, stocks and gold, as represented by their ETF UUP, TLT, SPY and GLD. Due to the irresponsible money printing by the global central banks, currencies will devalue jointly in due course. A smart way to front-run the financial hit is to move a bigger portion of cash equivalent to physical gold, which has performed wonderfully for the past two years and will likely be even better for the next two. The major asset classes are denominated in dollars and are vastly different from each other with gold being the most independent from the Fiat system, which is solely based on faith and credit. My earlier prediction of gold will reach $2000 by year's end is revised to November.

Dollar and treasuries should be treated the same as interest rates are falling to zero. Both are backed by the same government and are fully convertible. The 39-year bull run for the treasuries will end within a year or two, when interest rates rise. The long-term outlook for treasuries is troublesome.

Secondary rotation simply expands the above major assets to additional assets for better diversification.

The exits for investment capital likely will be the international financial markets as outlined below.

Secondary rotation of target asset list

The fundamental of the perpetual profit portfolio ( PPP) depends on the belief that the data of asset prices are relative to each other. Each asset runs its own course through time with uptrends and downtrends. If the onsets of the new uptrends are detected, the recognition can guide us to buy and then sell the assets for gains. Consistent profits in both bull and bear markets are possible if we are in tune with the policies by the Fed and hold only assets with uptrends.

The philosophy behind PPP that embraces the wisdom of the masters is illustrated below.

Secondary rotations among assets simply mean to expand the 4 major assets to a total of 16 dissimilar ETF assets. These expanded assets are picked to represent global stock and bonds, together with gold and miners which become more advantageous during times of quantitative easing. The assets are further divided into risk-off and risk-on assets as shown below. The goal of PPP is to manage the portfolio actively to achieve absolute return for each trade with the help from the following charts. Each short-term trading cycle is mostly less than 6 months, as dictated by the changing of the asset trends according to daily data.

The table below is the division of risk-off and risk-on lists, each with eight assets. Certain time intervals and macro conditions favor risk-off assets, and other times the conditions favor risk-on assets. The Ying-Yang symbol is insightful to show the cyclic aspects. Generally, these conditions that affect asset prices are ever changing through time. When erratic changes in macro conditions occur, more vigilant oversights and trading moves are needed. The best example is the liquidity crunch of the dollar in early March, when the stock market crashed more than 30% from the February high. Dollar index drifted downward first and then reversed much higher, as all other assets collapsed with stocks for two weeks before the Fed saved the markets by providing unlimited liquidity. The extra liquidity has been the dominant force to support the markets, the likely trade-off will be the devaluation of the dollar in the future. The risk-off panic mode is usually short-term and violent when the dollar is king.

The chart below displays 15 months of price records for the 16 assets with their average in black color. The selections for the list are robust and comprehensive. The number and individual choices can be modified if there are enough reasons to make changes in the future. This chart is an efficient way to view the global financial assets easily. Since the curves are normalized, each curve shows the cumulative and daily changes with a starting point of 1.00.

The flattening chart below takes the previous curves to be divided by the daily averages. The idea is to lay the curves horizontally for easier comparisons and to show the relative aspects of the curves with each other. The average curve in black also split the above average assets and the below average assets for the past 15 months. The curves mainly reveal the change of trends and reversals. This is an alternative way to view global assets daily.

The benefit is to observe the asset concurrently. Because of the inverse relationships of the assets, the gains in some are at the expense of others so that the relative strengths are apparent as shown. The upper and lower number of assets in PPP are set at 11 and 4, to satisfy diversification and selectivity.

Trend line for each asset class is quite easy to track with this visual as the assets rotate among each other. By tracking the trend of each asset, we can direct investments to concentrate on assets with the best uptrends and to skip the ones with downtrends. Nothing is drastically new other than stressing on the important point of disposing assets with downtrends quickly.

The risk-off vs risk-on sums chart below shows that each of the sums contains an average of 8 individual assets. Although the assets are dissimilar, the sums achieve a correlation index of -1.000, which is remarkably significant. The opposite polarity of the sums shows that the selection of assets for each sum is optimal from a design viewpoint.

The uptrend durations for either the risk-off and risk-on sums are labeled through time. The perfect polarities between the two sums imply that one sum gains on the expense of the other sum with little overlap. Each interval lasts 3 to 12 weeks. The transitions are marked by the breaking of the trendlines. These observations indicate that if we identify the prevailing trends and trade accordingly, perpetual profits are possible. This concept deserves more attention.

The chart below illustrates the two major asset classes TLT and SPY. $TLT, UUP*TLT in gray color, is the real value of TLT by including the value of the dollar index as UUP. The curves were normalized and then divided by the average of the major assets so that they rotate around each other for easier visual comparisons. The daily correlation between $TLT and $SPY is -0.98 for the past 15 months. The almost perfect inverse of TLT and SPY suggests ways to profit. Strategies such as only invest in one asset with a rising trend and then switch to the other one with a rising trend when a transition occurs. We can use established technical tools such as trend lines to define the uptrends and transition points. Perpetual profits are possible even with just two asset classes.

Another in depth way to look at the data other than just price is momentum. The momentum data are extracted from the original data by some mathematical operations. Momentum herein is merely the smoothed current price minus the average price of previous weeks for each asset. The day or week parameters can be different per individual’s preference.

The 15-month chart below is the momentum for risk-off assets. Momentum is usually more erratic to lead changes in price trends. The variations also reflect the amount of price changes too. GDX in dark gold color is definite the wildest which may suggest it is the best candidate for short-term trading. GDX is strongly associated with the price of gold. Momentum and the price charts provide a broader perspective to observe the changes in assets.

The risk-on momentum chart also displays similar fluctuations of assets daily.

The last chart quantifies the changes of price and momentum between certain days for each asset. There are various ways to compare these current changes with the running averages of previous periods, and to compare the values of a previous date. Each asset has 4 numbers to reveal the changes daily. A summation of these price and momentum numbers may be useful too. Extra numerical differentiators are sometimes beneficial for decision making. Examples are GDX and TLT below, the changes in price and momentum are quite different between the two assets.

Usually this analysis, spotting emerging winners and losers, only needed to be run each week, but the fast-changing asset prices demand shorter days for updates.

Some tactical measures for the current erratic markets are, own only assets that are advancing, mentality to liquefy the portfolio when macro conditions change and to quantify the changes of price and momentum to drive investment decisions.

Conclusion

To ask a question properly is to envision the ideal answer. New methodologies, that are data dependent, and thinking are necessary in the fast-changing investment world. Individual success in making profits still depends on the decision-making process to execute trades timely. This is the main purpose for the architecture of the new perpetual profit portfolio.

In summary, the new research condenses the global financial markets into 16 ETF. The analysis of these assets uncovers some surprises such as the inverse relations between TLT and SPY, also the risk-off and risk-on sums. The flexibility of mostly long trades among the 16 assets can achieve profitable results, if only the uptrend assets are in the portfolio. The changes of both price and momentum of each asset are quantifiable and can be displayed next to others.

Disclosure: I am/we are long GDX, GLD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.