r/letfs
Systematic Macro Trend Strategy for Investing in Growth Assets
Author shares a strategy using QQQ price action and high-yield bond credit risk to avoid deep bear markets in growth assets.
- The strategy uses high-yield bond credit risk to identify macro trends and avoid deep crashes in growth assets.
- Backtests show it successfully navigated major market crashes like the Dotcom bubble, Housing crisis, and 2022 rate hikes.
- The strategy has a very low amount of trades (12 in 23 years), which may lead to missed opportunities during prolonged bull markets.
- Growth assets inherently have higher beta and are highly sensitive to bond credit risk, making them vulnerable during market stress.
This is a Tradingview strategy that uses QQQ price action alongside high-yield bonds credit risk to help determine macro trends for growth assets. The biggest problem for holding growth assets for long term is that during deep crashes or long bearmarkets, these portfolios can get destroyed. This system is meant to handle smaller market pullbacks while it is designed to exit before deep corrections or long bear markets.
QQQ backtest:
Statistically this strategy has low amount of trades on the backtest (12 in 23 years), but that is what I am looking for since this is more of an investing strategy than "trading" strategy.
Blue arrow = long
Purple arrow = close
High-yield bonds are very sensitive to risk in the market. They are bonds issued by companies that have higher default risk so investors are quick to react if they see market stresses. Since growth assets tend to have higher beta compared to others, they are the most sensitive to bond credit risk. Retail is not the one buying these bonds, it's institutions. There is almost 30 years of data available. This is why I'm tracking high-yield bonds credit risk for my strategy.
When it comes to QQQ, it is an ETF from 1999 that tracks Nasdaq 100 index (top 100 largest non-financial US companies on Nasdaq). It is heavily dominated by growth companies. As it updates its holding regularly, it is reliable at tracking the momentum of growth assets in the future as well. This is why I track QQQ price action for my strategy.
How it works:
The strategy looks at high-yield bonds credit risk data to look for conditions where risk is easing/increasing. This data is published with 1 day delay, which is taken into account on the backtest for real-world accuracy. At the same time the strategy analyses QQQ price action to determine if technicals look ideal for long/close signal. I can tell you that the strategy includes a soft "stop loss" signal if QQQ were to drop -20% to protect capital just in case close signal didn't trigger before that.
Besides the main long and close signals, there are additional indicators (green triangles) as optional scale-in signals, which trigger on market dips as long as market risk is still contained. I've also scripted blue paint on days when long signal is near and red paint for days when close signal is near.
How it could be used:
Since the system is meant to track the macro trends of the market, it can work with a basket of quality growth stocks. Leveraged ETFs can also be considered, but you must be wary of high volatility and volatility decay. Also avoid over-allocation into leveraged products, because the drawdowns can be big even with a system. If the strategy is currently "long", you should avoid chasing it until the strategy gives the proper conditions for enter.
Tradingview doesn't allow any technical alerts for free users so another way for investor style plan is to set weekly alarms on phone as a reminder to check the chart. If QQQ is above 200 SMA, it's likely that long signal is near. If QQQ is below 100 SMA, checking for close signal should be more frequent.
Feedback:
I'm looking for feedback so I'm currently giving free access to everyone interested to see how the strategy works on different assets, let me know if you want to check it out.
Disclaimer:
This strategy is a software tool provided for educational and informational purposes only. This is not financial advice, and past performance does not guarantee future results. Always manage your own risk and position sizing.
What are you using to track high-yield bonds credit risk data and what exactly are you looking at to make a decision?
The strategy tracks ICE BofA US High Yield Index Option-Adjusted Spread. When market stress increases, the yield widens (goes up) and vice versa. The strategy looks at different technical conditions to determine if the spread movement has been significant enough.
Can you be more specific in how you determine if the spread movement was significant? Thank you
Saw this and got curious if it actually holds up, so I rebuilt the gist of it. Couldn't see your real rules, so this is my own rough version of the same idea, not a copy of yours.
Tested on QQQ, 25 years:
- long when QQQ is over its 200d SMA, out when it breaks the 100d
- cash whenever HY OAS sits above its own \~50d average (credit stress rising), lagged a day so there's no look-ahead
- hard exit if QQQ falls 20% off its high
The core idea clearly works. It ducked the worst of every big one (dot-com, '08, COVID, 2022 all came out far shallower than just holding QQQ), max drawdown went from roughly -80% down to about -30%, and risk-adjusted return was better across the board. The credit read is real, high yield flinches first.
Two honest catches though. Mine whipsawed badly, 200+ trades vs your 12, so whatever you're using to smooth the spread signal is doing the real work that my crude "above the 50d" isn't. And even with the shallow drawdowns, it sat underwater for \~8 years after the 2000 top and gave back a big chunk of the bull, ending well behind buy-and-hold QQQ on total return (about 7%/yr vs 9%).
So, solid as a capital-protection overlay, not a free lunch on returns. Curious how you keep the trade count that low.
https://preview.redd.it/fieksow47m9h1.png?width=1257&format=png&auto=webp&s=27303606274f7aea79304f9f3995fdb021dd6e12
Oh man sorry for some reason I didn't get notification of your message. That's some nice work there, nice to see someone else backtest the logic. Thing with doing trades only based on moving averages is that during choppy markets you can get a lot of trades like it seems you got. :)
Jaewon jung has presented a similar strategy based on the ICE BofA US High Yield Index Option-Adjusted Spread, you should take a look and compare the risk-on / risk-off criteria: https://www.1nve.st/p/the-best-macro-indicator-round-two
I would like to check it out
Thanks for the interest. I'm looking for couple more testers, I'll let you know when it's ready.
I would like to check out as well.
Thanks for the interest, we are getting closer to the open. I'll let you know when it's ready.
Fascinating. Your MaxDD number is almost certainly wrong, the 2000 trade you are showing makes you exit 20% below the highs...?
The max drawdown is just how Tradingview defines it, which looks at how deep the trade visited in the negative territory. 2000 trade exits around -20% yes. In that day Nasdaq 100 dropped -7% and it was still near 100 SMA.
Right, so that's exactly the gap. The MaxDD on the stats panel is the closed-equity number, but what the investor actually lives through is that ~20% intra-trade in 2000, plus whatever the open position is sitting at when you finally exit. TradingView has a separate "max equity drawdown" that includes open trades, can you screenshot that one? I'd bet the lived drawdown is closer to 25-30%, which is still good for QQQ exposure but a different story than the headline stat.
That data is locked behind subscription which I don't have at this moment. I might be able to show it later.