April 7, 2020 (updated periodically) -- Bullish Cross currently runs two actively traded theoretical model portfolios. The goal of these portfolios is to generally demonstrate the different ways one can practically execute a particular investment thesis for the purpose of outperforming the S&P 500. These portfolios have absolutely nothing to do with one another. They're completely unrelated and based on completely different investment strategies. Each portfolio is designed for different types of investors with different types of investment goals ranging from moderate outperformance of the S&P to speculative-aggressive growth.
Please keep in mind that Bullish Cross is not a registered investment advisor, and as such these portfolios are for educational purposes only. Furthermore, before making any investment decision please consider the suitability of these investments to your specific circumstances and consider seeking advice from your own personal financial advisor. These portfolios do not consider the question of total asset allocation and some are highly speculative strategies. Please read the Terms and Conditions of Use before viewing or analyzing these model portfolios.
Portfolio Strategy Summary
There are very different end goals and strategies for each of the model portfolios managed here at Bullish Cross. The BC Trading Portfolio focuses exclusively on making speculative investments in a wide-range of time horizons. The BC Fund Model Portfolio is a fairly conservative strategy that focuses on outperformance of the S&P 500.
The BC Trading Portfolio
The current BC Trading Portfolio strategy launched on September 25, 2017 and has produced a net return of 636.57% during the first year of trading. The Portfolio is currently up and 816.91% to date. All trades were executed live for BC subscribers and also posted to the Bullish Cross Twitter account.
The BC Trading Portfolio is a highly speculative options-trading portfolio and seeks to highly leverage different investment opportunities through the use of options and option spreads. It is the most actively followed and actively traded portfolio at Bullish Cross.
The BC Trading Portfolio executes two different strategies based on prevailing market circumstances of the day. First, the portfolio will place leveraged common stock trades based on both technical and fundamental analysis. These trades are made in-between the larger option trades which forms the basis of the primary strategy.
Second, the portfolio also executes a propriety complex option strategy on high beta stocks when those stocks become extremely oversold. The core of the BC proprietary option strategy capitalizes on volatility -- rather than stock direction -- and has been enormously successful in doing so.
The BC Trading portfolio's massive returns is due almost exclusively to the portfolio's effective hedging strategy. Any options portfolio can easily produce big winning trades. The problem, for most option portfolios, however, is that options trades can go in either direction.
Bullish Cross has always prided itself identifying long established trends of how certain stocks trade after becoming oversold. For example, what we've discovered with Apple ($AAPL) is that the stock will always respond to oversold conditions in one of two ways. Apple will either (1) immediately bottom upon hitting a 30-RSI on the daily chart and then proceed to sustain a 12-20% rally within 5-weeks of hitting oversold territory; or (2) the stock will continue to trade dramatically lower over the next 5-weeks, bottom and then rally 12-20% on the ensuing 5-weeks. This is how Apple has traded in the roughly 32 times the stock has become oversold since 2006. It has followed one of these two directions EVERY TIME. About half the time Apple immediately bottoms and then immediately rallies 10%. The other half of the time, the stock continues to crash, bottoms and then immediately rallies thereafter 12%. What we know is that in all cases, the stock does eventually begin a huge 12-20% rally that is achieved within 4-5 weeks of bottoming.
So here is how BC Trading Portfolio capitalizes on Apple reaching oversold territory. This applies to other stocks as well. Rather than just betting long and hoping the stock doesn't crash before rallying, the portfolio purchases a mix of both call options and put options. The ratio of calls to puts is determined by how oversold the stock is, whether the market is oversold and the breadth of the selling. We generally go 80/20 long-short through the purchase of call-spreads and put options.. Apple could become oversold after a 6% sell-off or after a 30% sell-off. The size of the sell-off impacts that ultimate ratio.
We put this hedging strategy to the test between 2017 and 2020 and each time the hedge held up. Each time we got it wrong, the hedge almost completely ameliorate the losses. And in some cases, the hedge produced a net positive return on the trade. Even though we were 80% long in most cases and only 20% short (via puts), the portfolio ended up with net positive returns when Apple went lower. That is because the one common denominator in all Apple oversold events is that volatility skyrockets. Apple EITHER crash or rallies. There is no in-between. Apple doesn't trade sideways after becoming oversold. It never has. And as long as Apple takes a direction, the trade is successful.
Now clearly this is the tl;dr version of the strategy and it is much more entailed at the time of execution. But this is the general options strategy and it has worked in both directions.
Bullish Cross strongly believes in the BC Trading Portfolio strategy and that the portfolio will prove to be something truly special and unique within the investing community. Mr. Zaky has been doing this for 20-years now. He has been through virtually every experience an investor can go through in the market. Mr. Zaky has brought all of that experience to bear in design a very powerful options hedging strategy which produced 816.9%% returns in its first three years of operation.
Bullish Cross Fund Model Portfolio
Bullish Cross also runs what we considered to be the ideal conservative hedge fund model portfolio. This model is intended for those who are interested in either potentially managing their own fund or who might be interested in investing in a fund Bullish Cross may launch sometime in the near-future. We believe the most ideal hedge fund strategy aims to accomplish two entirely independent but equally important goals:
Goal #1: Eradicate Risk of Underperformance
We believe in order to always remain in the game it is crucial to minimize or completely eradicate the risk of under performance. The biggest business-risk for most funds is the threat of underperformance on a highly positive or negative year. If the fund losses more than the S&P on a bad year or produces a fraction of the gains of the S&P on a positive year, chances are investors will pull their capital. Thus, to limit or significantly reduce the risk of underperformance, this portfolio will remain 80% invested LONG the S&P 500 either through relevant sector allocation or through direct purchase of the SPY. If the portfolio is at least 80% invested long the S&P 500 at all times, it significantly reduces the potential for underperformance. It hedges against any potential forecast or strategy that might miss a large rally as investors observed between 2010 and 2013. It limits human error.
Goal #2: Stock Selection & Market Timing to Outperform
Yet, limiting the potential for underperformance does not form the basis of an attractive fund or strategy. That is where goal #2 comes into play. And that is where the 20% on the sidelines, in addition to leverage, comes into play. There are two independent skills that Bullish Cross feels it can leverage to produce enough alpha to consistently outperform the S&P 500 on a year in and year out basis. We feel strongly that we can outperform through two separate strategies.
First, we feel we can pick the right stocks and sectors poised to outperform at any given period of time. In major corrections, there are always sectors that are hit much harder than others and those sectors always tend to outperform during recoveries. Picking the right stocks within those sectors will have a huge impact on the fund's ability to drive alpha.
Second, there are periods in the market where we feel the S&P 500 may be bottoming out after a correction or where we feel may be toping after an extended rally. If the market is extremely oversold after a major correction and poised to rally on a technical basis, we may leverage long 125% for the upcoming rebound. That way if the S&P 500 rebounds 10%, we outperform by a measure of 25%. The portfolio rises 12.5% while the S&P may rise 10% on that one rally.
Thus, the model portfolio aims to outperform through a mix of stock/sector selection and technical-based timing strategies. We seek to limit underperformance and human error by being 80% long the S&P 500 at all times regardless of our outlook. We may also hedge that 80% long position by writing weekly or monthly options against that long position and even purchase a small percentage of puts in situations where we feel there is considerable risk in the market.