One drawback of the NQ Long Strategy is that it takes into consideration the period from 2000 to 2003 which included the Dotcom bubble burst.

During the 1990s a lot of venture funding capital went into technology companies with the hope that one day these would turn a profit.  This included a lot of speculation and when a lot of these companies folded and most of these profits failed to materialize the Nasdaq 100 index came crashing down with them.  From its peak of 4691.61 in March 24, 2000 it dropped to a low of 815.40 on October 4, 2002 for an -82.6% drop in value.

Chart showing the Nasdaq 100 index from 1999 to 2016 including the Dotcom crash of 2000 and the financial crisis of 2008. Chart courtesy of Google finance.

Although one can never say with certainty if a situation like this is going to happen again in the future, the companies included in the index today are much more viable than those listed in 2000 and the years leading up to it.  Thus, a market downturn is not likely to be as bad.  For example, during the financial meltdown of 2008 the Nasdaq 100 index went from a peak of 2213.86 on November 2nd, 2007 to a low of 1064.70 on March 6th 2009 which represents a drop of -51.9%.

Including these extreme case scenarios in the backtesting modeling process offers the advantage of having a strategy that is better suited for market crashes.  However this comes at a cost as more common market conditions are not fully taken advantage of.

To mitigate this effect one can exclude extreme periods from the modelling process and give more weighting to more recent market conditions.  This was done by backtesting the strategy over the last 11 years, from 2006 to 2016.  Doing so one generates different strategy parameters that are more suited to moderate market conditions.  We use these parameters for the NQ Long II.

During this period, from 2006 to 2016, the NQ Long II strategy had an average annual return of 56.37% and a maximum drawdown of -39.52% for a Risk Reward Ratio of 1.43.  It averaged 8.0 trades a year with an average hold of 6.65 days.

Tables showing the month to month performance of the NQ Long II strategy from 2001 to 2016. Optimization was done from 2006 to 2016 to take advantage of more recent market conditions.

In particular, this strategy took full advantage of the recent market conditions posting oversized returns of 125.31% and 141.02% on the allocated capital of $9,750 in 2013 and 2015 while mitigating losses to -26.86% in 2008.

During the same period, from 2006 to 2016 the benchmark had an average annual return of 12.50% and a maximum drawdown of -53.71% for a Risk Reward Ratio of 0.23.  Over the backtesting period, the NDX had one loosing year, and a success ratio of 59.8% up months.

Tables showing the month to month returns of a $9,750 investment in the NDX over the backtesting period. This is the equivalent of a buy and hold approach.

Using the Risk Reward ratio as a comparison metric, the NQ Long II strategy is about 6.2 times better than a buy and hold approach in the Nasdaq 100 index.

Growth of $9,750 invested in the NQ Long II strategy compared to $9,750 invested in the NDX.

A second look at the performance tables for the NQ Long II strategy shows that it had a small gain in the first 8 years, from 2001 to 2008.  This is much better than the index which has a loss of -$4,704 over the same period but not as good as the NQ Long I which had a gain of $18,781 over the same period.

It is worth noting that in the above discussion, the monies generated from the NQ Long I strategy were not re-invested in the system.  On the other hand, by its nature, a buy and hold approach automatically re-invests any monies that are generated.

Thus one could potentially increase the returns of the NQ Long I system by re-investing some of the monies generated.  That said, investing in the Futures Markets requires different considerations than investing in a stock or an ETF.  For a more complete discussion between the two approaches, including risk considerations and money management, please read our post Investing in the Futures Markets.

Since the optimization and backtesting was done from 2006 to 2016, 2001 to 2005 constitutes an out of sample data set.  The numbers above demonstrate the the strategy is stable although not optimal in unfavorable market conditions.  The question then becomes, which strategy should one use NQ Long I or NQ Long II?  There are three possible answers to this question:

  1. If you think that another 2001 or 2008 scenario is unlikely then you might favor NQ Long II.  This strategy had a loosing year in 2008 which was a strong down market but more than made it up in 2013 and 2015 which were strong up-trending markets.
  2. On the other hand, if you think that the recent bull market is close to being done and we might be in for another downturn soon, then you might prefer NQ Long I as it does better in down markets.
  3. Finally, if like me you don’t like to guess as to what the market is going to do next, then you would want to allocate  capital to both NQ Long I and NQ Long II.  That way, no matter what the market does you”ll be well positioned to take advantage of it.