Kottke Associates : MV Program

Summary

The MV program incorporates fundamental and price indices into a proprietary, analytical formula to indentify price trends on a periodic basis. The program generates signals for 7 commodity spreads (bean/corn wheat/cattle beanoil/soymeal live cattle/live hogs live cattle/corn soymeal/hogs soymeal/corn). A commodity spread signal results in the initiation of a long position in one commodity and simultaneously a short position in the other one. A flat position signal results in the initiation of a long or short position in one of the following commodities (soybeans/soyoil/corn/cattle). Each day the models produces for each spread an index which fluctuates around 100 with a standard deviation of 5. A potential buy signal occurs when the index is above certain parameters. A potential sell signal occurs when the index is below certain parameters. Before a potential buy/sell signal translates to a real buy/sell signals it needs to confirm. The waiting period is different per spread.

By introducing this waiting period it reduces the chance for flipping in and out. Per spread there are 2 sub-models. Also the parameters for entry and exit of the 2 models will be different. A reduction or exit of a position is triggered either by the index value dropping below certain parameters or if the accumulated losses surpasses certain levels. Also these levels are different per spread. Each leg per spread is equal to a stated face-value and depending on the price level that translates in a number of lots. A major benefit is that in terms of lots the positions are smaller when the price-level is high than when the price-level is low. The flat models have a similar procedure for entry and exit. The flat models diversify well with the spread models and reduces the drawdowns.

Risk Management

The model produces index values which fluctuates around 100 with a standard deviation of 5 Based on these index values a position gets initiated. The size of position is equal to a stated face value. A major benefit is that in terms of lost the positions are smaller when the price level is high than when the price level is low. A position will be reduced or exited when the model generates an index value to reduce or exit a position. In addition there are stop-loss levels which can trigger a reduction or an exit of the position regardless of the model output.