Kelly Letter Performance Notes


Newer Performance Notes

Week 11 to 3/16/18
Year-to-Date Performance

S&P 500 +3.3% | Kelly Letter +5.7%
3Sig +2.9% | 6Sig +1.6% | 9Sig +14.8%

Our preferred smaller-company indexes are holding up better than their large-cap peers in the focus on US trade policy.

Tariffs, withdrawal from multilateral agreements, and the resulting higher price of imported goods make business harder for large American multinationals. Smaller companies tend to be domestically centered and therefore less sensitive to changes in trade policy.

Week 10 to 3/9/18
Year-to-Date Performance

S&P 500 +4.6% | Kelly Letter +6.7%
3Sig +3.0% | 6Sig +2.6% | 9Sig +17.1%

Our rebound from a recent balance low of $2,434,604 in Note 6 sent February 11 has taken us 10.6% higher, nearly back to our recent balance high of $2,735,894 in Note 4 sent January 28. Another 1.6% tick up will do it.

We are ahead of the market, which is good, but continue wishing that prices would decline one of these quarters to generate a big buy signal to pull in capital from our bond funds.

Week 9 to 3/2/18
Year-to-Date Performance

S&P 500 +1.0% | Kelly Letter +1.6%
3Sig -0.5% | 6Sig -2.3% | 9Sig +9.2%

We may get our healthy buy signal this quarter yet, which is what we’ve been wanting. A week ago, it looked like the correction was going to disappear in the rearview mirror, but last week’s action kept some of its benefit tantalizingly still-at-hand for us.

February’s price decline ended a 10-month rising streak for the Dow and S&P 500, while the Nasdaq moved lower for the first time in eight months.

It’s inappropriate to refer to rising prices as “winning” and declining ones as “losing,” because both are part of a profitable process.

The metaphor I like is respiration. Neither inhaling nor exhaling is preferable, but part of the necessary package. Just as we don’t think of inhaling as winning and exhaling as losing, nor should we assign those labels to price movement. Hence, February showed a decline, that’s all, and one we hope persists another month.

Week 8 to 2/23/18
Year-to-Date Performance

S&P 500 +3.1% | Kelly Letter +3.3%
3Sig +0.8% | 6Sig -0.5% | 9Sig +11.8%

The rebound continued at a much more modest pace than in the previous week, when the S&P 500 rose 4.3% and our portfolio rose 6%. The Nasdaq 100 remains the leader, having risen 5.6% in the previous week and 1.9% last week, the best of our six tracked indexes in each week. Our fund in 9Sig rose 18.2% in the previous week and 5.6% last week.

The recent correction is looking like a blip, and a v-shaped one at that. From 2873 on January 26, the S&P 500 fell 10.2% to 2581 on February 8, then rebounded 6.4% to its current 2747. Another 4.6% gain by the big index will make it seem as if nothing happened.

Week 7 to 2/16/18
Year-to-Date Performance

S&P 500 +2.5% | Kelly Letter +2.2%
3Sig +0.3% | 6Sig -0.6% | 9Sig +8.6%

The week provided us with a nearly complete rebound from the previous week’s decline. We rose 6.0% last week after declining 6.3% the week before.

Contrary to the standard media method of cheering price rises and booing declines, we are hoping for a lower-price quarter. Quarterly fluctuation is more profitable than going too far in either direction. Of course, what anybody wants is irrelevant.

It took just five consecutive days of stock price appreciation to push the S&P 500 above its 50-day simple moving average. Humorously, media announced that it was the index’s first time above the demarcation “since last week’s big sell-off.”

I’m waiting for someone to see something one afternoon that’s happening for the first time since that morning. Possibly: “Stocks tick up to a second decimal place value of 2 for the first time since 10:47.” Said with enough urgency, many people would believe it mattered. …

We’re staring at a half-full glass this weekend.

The half-full way to view it is that our portfolio came roaring back from a price dip right away, which is consistent with what financial media say should make us happy.

The half-empty way to view it is that we were wanting and still want a serious buy signal this quarter, but last week’s snap-back more than halved our shortfall.

Week 6 to 2/9/18
Year-to-Date Performance

S&P 500 -1.8% | Kelly Letter -3.5%
3Sig -3.3% | 6Sig -6.2% | 9Sig -0.7%

The string of 5% losses across the indexes represents the biggest one-week downdraft for stock prices since early 2016.

As usual, explanations are narrative fallacy. The truth is probably this simple: the market went 15 months and 34% higher without so much as a sniffle, and was due for a correction.

So the correction everybody knew was coming someday, just not when, came. That’s all, but it triggered an outpouring of pent-up frustrations bigger than usual because it had been longer than usual in coming and smoother than usual in the run-up.

It’s not true that we haven’t seen anything like last week in recent times. Just two years ago, exactly, in February 2016, the market fell 15% on worries that China’s economy was slowing and heading for a hard landing. It wasn’t, and stocks got back to rising.

We never have cause for concern in our Sig systems, which it’s worth repeating are built for the express purpose of exploiting volatility. They take surpluses off the table for safekeeping, as they just did at the beginning of January. They redeploy them into shortfalls, as we hope they’re able to do at the beginning of April.

We’re sitting on $725,150 of bond balance. Our shortfalls this weekend would draw in just $255,558 of it. We could use another round of bargainizing.

Week 5 to 2/2/18
Year-to-Date Performance

S&P 500 +3.4% | Kelly Letter +3.0%
3Sig +0.5% | 6Sig +0.7% | 9Sig +9.4%

The market reversal moved all three of our Sig plans back into shortfall territory for the quarter. A week ago, they sat on a collective surplus of $34,264. Today, they’re at a shortfall of $94,886.

(Note: This shortfall refers to the plans falling short of their quarterly growth targets, not into negative territory for the year. As you can see above, all remained above zero percent performance at the time of this writing.)

This is what we wanted, a price decline, as mentioned over the last few months. After another round of selling at the beginning of January, we maintain buying power of $669,774. That’s after last week’s 1% drop in bond prices.

Ideally, we would be moving the last of it in near the bottom of whatever stock-market slide is underway, although this would only be possible if it were to coincide with our pre-determined trading dates. Luckily, close enough is good enough in our system.

Isn’t it nice not needing to care what happens next?

Week 4 to 1/26/18
Year-to-Date Performance

S&P 500 +7.6% | Kelly Letter +8.4%
3Sig +3.9% | 6Sig +6.8% | 9Sig +17.4%

Our Signal system continues performing well. Last week saw all three permutations make it into the surplus zone for the quarter, just four weeks in.

The star of the lineup is 9Sig, which has performed so powerfully since its debut a year ago that it’s almost ready to overtake 6Sig in size, as the summaries below make plain.

Balances on 12/30/16:

3Sig $948,018
6Sig $644,074
9Sig $465,417

Balances on 1/26/18:

3Sig $1,100,057 (+16.0%)
6Sig $836,942 (+30.0%)
9Sig $798,895 (+71.7%)

Just last week saw 9Sig’s balance increase by $35,639. Its balance is now only $38,047 shy of 6Sig’s balance, so we could well reach the mid-point of this quarter with a 9Sig balance larger than our 6Sig balance. This is astonishing.

Week 3 to 1/19/18
Year-to-Date Performance

S&P 500 +5.2% | Kelly Letter +6.5%
3Sig +3.5% | 6Sig +5.6% | 9Sig +12.1%

Just three weeks into the new year, 9Sig is once again outshining its less aggressive senior partners in 3Sig and 6Sig. It uses 3x leverage, therefore by definition it will have an edge in a rising market, and all one ever reads about anymore is the relentlessly rising market, hence the shining spotlight on 9Sig.

And, oh, what a light! At the three-week mark, and just two weeks after its quarterly rebalance that robbed it of $98K of exposure to the Nasdaq 100 at 3x, it’s only 0.8% below its balance target for this quarter. So far this year, 9Sig is up 12%.

Week 2 to 1/12/18
Year-to-Date Performance

S&P 500 +4.3% | Kelly Letter +5.6%
3Sig +3.0% | 6Sig +4.8% | 9Sig +10.3%

The S&P 500 is off to its strongest start to a year since 2003. Despite our selling into strength last week and currently holding 28% of our capital in bonds, we’re staying ahead of the big index.

However, it’s getting harder for us to do so. Counterintuitive though it may be, we need a correction or a crash one of these quarters to achieve greater benefit from our price reactive system. An always-rising market is the hardest kind for us to beat, and this one’s been on fire for quite some time.


Week 52 December 29, 2017
S&P 500 +21.8% | Kelly Letter +22.6%

In 2017, we grew our balance from $2,057,509 to $2,523,385 with a quarter of our capital in safe bonds.

Other key metrics for us:

NO charts consulted
NO pundit warnings heeded
NO market forecasts offered
NO stop-loss or other specialized orders used

Simplicity and rational reaction won again. Over time, they always do.

November 26 Comment: Stocks rebounded from their two-week decline last week, and are now back at all-time highs as investors revisit their annual excitement about holiday sales and historical winter market trends. Extra strength in technology and small caps powered our portfolio farther ahead of the S&P 500 for the year. … We are pulling nicely ahead of the market, and it’s no longer just 9Sig in Tier 3 doing all the work.

October 8 Comment: We’re back above the S&P 500 for the year. If this year’s fourth quarter goes anything like last year’s, we’ll put a lot more daylight between the benchmark and ourselves by the end of December. Doing so with a quarter of our capital safely in bonds would be impressive.

October 1 Comment: Just a week ago, Tier 1 sat 0.4% below its target for the quarter. Then, out of nowhere, it shot 3.2% higher, grabbing all of its quarterly goal in the final week. … I wrote last Sunday that “[Our growth fund] in Tier 1 has roared back 7.3% to $71.95 from $67.08 on Aug. 21, leaving us with just a $3,230 shortfall for the quarter.” The stats have improved since then. [The fund] is now up 10.6% since Aug. 21. … The resurgence in Tier 1 has helped us reach two impressive milestones this weekend: (1) A balance of more than $1 million in Tier 1 alone ($1,026,505 to be exact), and, (2) A portfolio return now dead even with the S&P 500, both at 14.2% year-to-date.

July 21 Comment: We pulled almost even with the S&P 500’s YTD return last week. All upward momentum is still from the Nasdaq 100 in Tier 3.

June 30 Comment: Even though both Tiers 1 and 2 fell short of their quarterly goals, our portfolio rose $68,088 (3.2%) in the second quarter. We’re less than two percentage points behind the total return of the S&P 500 this year. We’re up 7.4% to its 9.3%, putting us in the running to beat the benchmark in 2017, and are well ahead of it over the past three quarters due to the powerful small- and mid-cap showing in Q4, which is partly what caused this healthy backing and filling in Q1 and Q2.

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