Managing TQQQ Volatility to Higher Performance

The Kelly Letter Excerpt
The following is from this year’s Note 16 of The Kelly Letter, which went out to subscribers last Sunday morning.

On Wednesday, April 17 the Nasdaq 100 (NDX) reached an intraday high of 7715, above its previous all-time high of 7701 on October 1. The event enabled my research partner Roger to log an important milestone in a study he’s been doing on the NDX 3x fund’s (TQQQ $64 +73% YTD) tracking of the index.

This issue frequently comes up when people are first exposed to our use of leverage in 6Sig and 9Sig. Despite my having repeatedly corrected the inaccuracy of media warnings against leveraged funds due to their daily tracking and beta decay, many people remain skeptical of any plan that holds leveraged funds for an extended period of time.

My thesis is that beta decay is less of an issue than reported, even over long periods, and that our plan’s moving into and out of fluctuating funds relegates it to a non-issue. We’re not going for a precise multiple of an index’s performance, we’re going for higher volatility. We use that higher volatility to our advantage. Some time periods will show us recording precisely double or triple the S&P MidCap 400 in 6Sig and the NDX in 9Sig, or more, while some will show us performing below the advertised multiple, but we should come out well ahead of the indexes over time.

To illustrate, let’s turn to Roger’s findings.

From October 1 through April 18:

+0.58% NDX
-10.61% TQQQ

This is the type of comparison media fixate upon, concluding that holding leveraged funds does not work. However, it’s not the whole story.

From the low on December 24 through April 18:

+30.35% NDX
+91.05% NDX performance multiplied by 3
+110.46% TQQQ

While TQQQ did underperform NDX in the time frame, its performance greatly exceeded NDX’s from the bottom. Should things keep going how they’ve been going, a holder of TQQQ through the cycle would pull ahead of NDX in another month or two.

We know that eventually TQQQ reasserts itself over the index even when merely held, rather than magnified with our buying of weakness and selling of strength. According to Roger, the gain multiple of TQQQ from December 1, 2015 is 3.3x, better than the fund’s goal of 3.0x.

When the long-term dominance of the fund is coupled with our 9Sig plan’s buying of weakness and selling of strength, performance improves further in most time frames, even short ones.

From October 1 through April 18:

+0.58% NDX
-10.61% TQQQ
+15.91% 9Sig

What accomplished this mathematical magic was our January signal, which bought another $287K of TQQQ during its cheap phase. We paid $38.65 on January 7. It’s $63.98 now after a 65.54% ride higher, on which we sent a lot more money than we sent down to the December 24 low.

When you send less money down and more money up, the numbers work in your favor.

Yours truly,
Jason Kelly
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