AOTB Portfolio Optimization
Hello Bubble Riders!
One image explains the purpose of this piece. Below is featured the performance of the crypto market over the past year.
The principal strategy we’ve discussed for these sorts of environments is to yield farm. In light of this purpose, our yield farming report has been simplified so that it requires only a weekly update. Even if you make “only” 10% by yield farming during this period, your portfolio will be positive while the “smart money” agonizes under 70% losses (see relevant Tweet here).
The recent last year’s price movement in the crypto market teaches us something further, namely that there are not two, but three sorts of markets: bull markets, bear markets, and crab markets–i.e., markets where things go up, go down, and go sideways. Would it not be more sensible to devise a plan for all three?
To add a bit of urgency to the consideration, most now think that we’ll have a recession in 2023. Stan Druckenmiller, widely regarded as a Wall Street legend, states that he will be “stunned” if the US economy doesn’t have a recession in 2023. He goes on, and other predictables such as Prof. Nouriel Roubini, think that the S&P will struggle to get above its 2022 highs in the next 10 years (that would delay growth through 2032).
They paint a grim, likely too pessimistic view. Yet, if the future resembles anything like it, then you and I will be rewarded hansomely by learning how to do more than grow incrementally during this period.
Here, then, is the fuller view of the art of the bubble–with subscribers of course earning the advantages of the new signals to be used.
Long Trending Long Strategies
The first lesson of The Art of The Bubble presents evidence that it is smarter to hold on too long with a bubble than to get out early. In a line, get burned, just a little.
This lesson holds provided that you are trading a traditional bubble, such as the tech bubble of 1999 or cryptos in 2012, 2016, and 2020, and not a pump and dump (the distinction between which makes up the substance of Lesson 10).
The reason for this counter-intuitive strategy turns on the character of bubbles themselves. They are irrational and non-linear, meaning that they make most of their money at the end of a run. Jumping out early thus means forfeiting most of your gains.
More than 300 peer reviewed articles support the claim that one is able to make money over the risks taken on merely through the use of a simple moving average (SMA) of the past 200 days.
The idea is that the trend is your friend, so that as long as the price is above the moving average, you should continue to hold. Here is how that strategy played out in 2017 (for a 26x return).
The original 15 lessons of The Art of The Bubble focus on ways to reduce just how much is given back at the end–and how to remain safe throughout. Our proprietary algorithm does a considerably better job than the 200 day SMA.
No matter how refined the strategy, however, it does not make money when the market is in decline (which is why the simple proposal has been to use yield farming while waiting) and it tends to lose money as the market goes sideways. The latter creates signal noise, which is the real bane of the strategy.
Might there not be a way to compensate for these inherent shortcomings?
The Strategy Matrix
There are several ways to compensate for those shortcomings, including cost effective risk mitigation through options. But one ought to begin with the most obvious: why not short the market when it declines under the moving average?
The principal reason this “obvious” approach fails to return satisfactory returns calls into view the fact that, over the past several centuries, our global market has grown. It grows because the planet is more populous and because those people have invented sequentially better technology. That technology, in turn, has facilitated greater output per capita. These three points go a long way in explaining why the S&P 500, post WWII, has earned an average of an 8.8% compound annual growth rate. The market has, in brief, a positive bias.
A long trending strategy that shorts the market must, as a result, be more judicious. It will involve different entry and exit signals, and it will need both target gains and stop losses.
My plan is to develop what this involves in more detail over a series of these newsletters. At present, I hope to reveal the broader conceptual map. For even the corrected long term short strategy will still suffer defects–almost exactly the reciprocal ones that the long term long strategy suffers. The combined results are good, then, but too bumpy for the comfort of most.
In addition to these trend following strategies, then mean reverting strategies that are short in duration, some 2 to 4 days, have shown, in historical back tests, to complement the performance of trend following strategies.
To give you a sense of how these work, look at ETH during part of its last bull run. That spike just looks anomalous. Surely, it was going to decline a bit.
A mean reverting algorithm would identify spikes such as the one pictured and enter a short position for a few days in hopes of making a 4% return for stocks, or 11% return for cryptos.
Such mean-reverting strategies tend to use the relative strength index (RSI), which measures whether a stock or crypto has moved up “too much” recently. The “set format,” however, which you’ll on sites such as TradingView, is typically worthless. They use a 14 day timeframe, which proves too slow for a quick trade.
In any case, mean reverting strategies can short spikes or buy dips. So there are both mean reverting long and mean reverting short strategies. In schematic form, you might think of the combination of these strategies as they in each market condition–bull, bear, or crab–in the following way.
|Bull Market||Bear Market||Crab Market|
|Long Term Long||Yes||No||No|
|Long Term Short||No||Yes||No|
|Mean Reverting Long||Yes (.5)||No||Yes (.5)|
|Mean Reverting Short||No||Yes (.5)||Yes (.5)|
I have indicated that some strategies do less for overall performance with the (.5) beside them. The mean reverting strategies tend to do well in two out of three environments, but they return less in each. The combination of approaches provides for regularity across market conditions.
The approach which the AOTB Dynamic Risk Parity portfolio offers (for cryptos) and our Bubble Rider Alpha portfolio (for stocks) prove tremendously effective. Both are massively outperforming the benchmark and their peers.
The new matrix represents an advance in the same direction.
It promises to offer higher returns across all conditions, which is preciely what we need if we are going to thrive and not merely survive through the coming recessionary environment.
It also avoids the liquidity crunches that tend to accompany asset diversification strategies. It is this correlation crunch which explains why Ray Dalio’s Pure Alpha II fund, a portfolio pre-eminently reliant on such “uncorrelated assets,” lost more than 30% in 2020.
It’s enough for a single newsletter, and enough to let our subscribers know why the team will be tracking more coins and ETFs in our daily tickers.
This week I wrote a number of pieces that are related to this post, so you might want to have a look if you’ve missed them.
That’s it for this week. Remember to join us on Discord if you haven’t already.
This newsletter is provided for educational and entertainment purposes only. Robin Technologies and Analytics LLC is the firm that distributes The Art of The Bubble products. The firm does not provide individually tailored investment advice and does not take a subscriber’s or anyone’s personal circumstances into consideration when discussing investments; nor is Robin Technologies and Analytics LLC registered as an investment adviser or broker-dealer in any jurisdiction.
You should expect no financial returns one way or another based on statements contained herein. These points hold equally for any statements that could be attributed to The Art of The Bubble or any related business entities or personnel operating in association with Robin Technologies and Analytics LLC. If you decide to buy or invest in anything, then your returns and potential losses are your own. No statements about taxation are taxable advice and you are encouraged to consult your own tax professional. You are also encouraged to do your own due diligence before investing in anything.