EVALS Q3 2009 Update

While EVALS had impeccable market timing in the first half of 2009, the unprecedented continued decline in volatility threw EVALS for a loop in July. The ugly result was that not only did EVALS miss out on a strong bullish month, it compounded the pain by posting its largest monthly loss to date in July, a decline of 18.85%.

In fact, EVALS did not flip back to a bullish bias until early September; and while September was an excellent month, it was not good enough to salvage the quarter, which was down 9.4% in aggregate. EVALS ended the third quarter with a cumulative gain of 15.71% for the calendar year to date, some 1.89% behind the benchmark S&P 500 index.

For the record, the bearish positions favored most by EVALS during July and August were in real estate, small caps and consumer goods – all of which outperformed the benchmark as earnings and economic data began to suggest that the economic downturn was in the process of reversing.

Since the change to a bullish bias in early September, EVALS has been favoring long positions in commodities and emerging markets and is on track to finish the year on a high note.

The graphic below shows the monthly performance for EVALS and the SPX since the August 21, 2008 inception. I will update the performance for the full year in early January.

EVALS Q2 2009 Update: +18.47%

The second quarter of 2009 saw EVALS gain 18.47%, beating the 15.22% advance in the benchmark S&P 500 index by 3.24% (including rounding errors.)

Throughout April, May and most of June, EVALS had strong bullish positions in emerging markets, metals, mining and energy services. As a combination hedge plus volatility play, EVALS also was long a covered call ETF for the majority of the quarter and one of the VIX futures ETFs for the latter half of the quarter. This combination consistently outperformed the SPX during April, May and the first half of June.

As commodities prices topped and emerging markets began to see some selling pressure, the portfolio exited all these positions and switched to an aggressive short position about a week before the end of the quarter. By the end of June, the short bias was responsible for a 5.78% deficit to the SPX for the month, as stocks surged to a lower high by the end of the month.

With the benefit of 20-20 hindsight, it now appears that these short positions (which have been exceptional performers in the first two weeks of the new quarter) were initiated about a week too early – much as the long positions from November were put on about a week before the final large VIX spike. This leads to an interesting sidebar about market timing. Undoubtedly, the majority of trading systems employ some sort of trend following strategy. They wait for a trend to develop and meet certain criteria for trend strength before new positions are added. Volatility systems, however, are more attuned to identifying changes in the prevailing trend. These signals are not infallible, of course, but I will be glad to be a week early here and there if it means catching quite a few new trends right at the beginning.

The graphic below shows the monthly performance for EVALS and the SPX since the August 21, 2008 inception. For the first half of 2009, EVALS is up 27.70%, a full 25.92% better than the SPX, which managed a 1.78% gain through June 30^th. Since the portfolio’s inception, EVALS has a loss of 14.71%, which is 12.10% better than the 26.81% loss in the SPX during the same period.

Going forward, I expect to be aggressive and opportunistic, looking to capitalize on what is likely to be much smaller bullish and bearish moves in the market during the second half of the year.

Finally, to reiterate what I have said in the past:

EVALS is a very aggressive trading approach that does not mind striking out from time to time, provided the home runs provide more than adequate compensation for the risks. For the first 10+ months, this strategy has been successful in aggregate, but not without some bumps along the way.

EVALS Q1 2009 Update

I continue to receive questions about how EVALS has been doing and what some of the positions it has taken are, so I have decided that henceforth, I will publish a quarterly update in this space with some brief comments about performance.

Looking back at 2008, the portfolio tracked slightly ahead of the benchmark S&P 500 index for all except the week leading up to the November 21^st bottom. During that week, the portfolio had a decidedly bullish lean; when the 741 low was put in, the damage to the likes of QLD and URE was such that EVALS was not able to make up that performance gap by the end of the year. The result was that performance for 2008 lagged the SPX by 4.27%.

EVALS had an aggressive bullish position at the start of 2009 and handily beat the SPX for the first half of January, though most of the performance gap dissipated by the end of the month. February was a similar story of the first and second half of the month; this time EVALS slipped below the SPX by the time the month was over.

The beginning of March saw EVALS extremely bullish, with leveraged 3x and 2x funds. When the markets bottomed on March 6^th, EVALS took off like a rocket. In the second half of the month, EVALS took some profits in financials, small caps, emerging markets and China, most of those coming at the open on March 24^th. In the past week or so, EVALS has been weighted most heavily in long commodities positions and has managed to build upon gains from earlier in the month.

As the chart below shows, during January and February, EVALS had a +1.33% and -2.78% performance relative to the SPX. During the month of March, EVALS was 26.22% better than the SPX. With the SPX down more than 11% so far in 2009, I am pleased that EVALS is up more than 7% and also that in the 7+ months since EVALS was launched, it is showing a 9.23% advantage over the SPX.

In the event the particulars are not obvious to the reader, EVALS is a very aggressive trading approach that does not mind striking out from time to time, provided the home runs provide more than adequate compensation for the risks. For the first 7+ months, this strategy has been successful in aggregate, but not without some bumps along the way.