Sunday, May 31, 2015

5/31/2015 More Whipsawing


Full Model
Date
Return
Days
JOY
12/8/2014
-23.87%
174
PWR
3/9/2015
3.49%
83
BHE
3/31/2015
-4.95%
61
CBI
4/2/2015
13.37%
59
MTZ
4/9/2015
-8.59%
52
NE
5/7/2015
-4.67%
24
DRQ
5/15/2015
-1.90%
16
RES
5/19/2015
-0.14%
12
CRR
5/19/2015
1.07%
12
SPN
5/28/2015
0.09%
3
(Since 5/31/2011)
S&P
Annualized
11.88%
Sector Model
Annualized
20.48%
Full Model
Annualized
18.66%
S&P
Total
56.66%
Sector Model
Total
110.71%
Full Model
Total
98.24%
Sector Model
Advantage
8.61%
Full Model
Advantage
6.78%
Previous
2015
S&P
53.06%
2.36%
Sector Model
122.60%
-5.34%
Full Model
101.13%
-1.44%

 

The Sector Model continues to whipsaw. It is now calling for XLU, and if there is a favorable gap in the morning I will sell XLE to buy XLU.

The Full Model continues to pour into the oilfield industry.

Ours not to reason why…

Tim

 

Thursday, May 28, 2015

Wednesday, May 27, 2015

5/27/2015 Whipsaw

The Sector Model shows XLE as the call after the close.

If there is a favorable gap at the open, I will trade. If not, I will recalculate before the close.

5/27/2015 Sector Change

The Sector Model sold XLE and bought XLU before the close.

Monday, May 25, 2015

05/25/2015 Sector Change

The Sector Model changed from XLE to XLU.

I missed the trade and will take it in the morning if there is a favorable gap.

Thursday, May 21, 2015

5/21/2015 Mean Reversion -- good and bad


Sector Model
XLE
-3.53%
Full Model
Date
Return
Days
JOY
12/8/2014
-18.78%
164
SSYS
3/3/2015
-44.40%
79
PWR
3/9/2015
4.59%
73
BHE
3/31/2015
-1.39%
51
CBI
4/2/2015
20.16%
49
MTZ
4/9/2015
-7.14%
42
NE
5/7/2015
-3.98%
14
DRQ
5/15/2015
-1.12%
6
RES
5/19/2015
-2.49%
2
CRR
5/19/2015
-6.02%
2
(Since 5/31/2011)
S&P
Annualized
12.21%
Sector Model
Annualized
20.87%
Full Model
Annualized
19.03%
S&P
Total
58.03%
Sector Model
Total
112.37%
Full Model
Total
99.81%
Sector Model
Advantage
8.67%
Full Model
Advantage
6.82%
Previous
2015
S&P
53.06%
3.25%
Sector Model
122.60%
-4.59%
Full Model
101.13%
-0.66%
 
I won’t be able to do an update this weekend, so a quick note on performance statistics, benchmark, and mean reversion.
A full look at the entire 1998-2010 back-test, compared to 2011-2015 live performance shows two major deviations from the long term benchmark:

 
The low deviation from benchmark (shown here as the exponential trend-line) was back in first quarter of 2009.
The high deviation from benchmark was in the first quarter of this year.
The outperformance of last year should create a drag for this year, and in fact the rolling 12 month performance of the model, the market, and benchmark show that the model is far closer to the market than benchmark:
Rolling S&P
13.51%
Rolling Sector
14.57%
Benchmark
24.39%
 
Still outperforming the market, but barely.
What gives?
Mean reversion.
Kahneman writes in his book Thinking, Fast and Slow about a training session he had with the Israeli air force. He pointed out that people responded better to praise than punishment, when an officer contradicted him and explained that when he criticized bad performance from pilots he got better performance, and when he praised good performance he got worse performance.
Kahneman also notes the so called Sports Illustrated curse where an athlete who makes the cover one year will have a bad year the following one.
It’s a perverse experience to find that we get bad results from those we praise and good results from those we punish.
The reality is that we all underestimate the randomness of life: half of the time we are above our average and half of the time we are below our average. The key isn’t to focus on how we compare to our average, but instead how our average compares to other averages.
Take a look at our performance chart above. For the full time period we are above our average trend-line, which means that we run the risk of under-performing in the short term.
The question isn’t what to do in the short term.
The question is whether our average is better than the market’s average.
 
Another perverse effect of human response to mean reversion is that we tend to get excited about the market just when it is ready to tank, and we bail out of the market just when it is ready to rally. This again has to do with our mental blindness to mean reversion.
Hedge Funds are especially susceptible to this effect, and respond by closing their funds to new clients when the market gets over heated. Hedge funds take a percentage of the profit, but also take a percentage of the loss. It is possible for a hedge fund to out-perform the market every single year and still go bankrupt if they get over loaded with clients at tops and under loaded at bottoms. Their profit will be from a smaller client base and their loss from a larger client base: making money for their clients who ride it out, but bankrupting the hedge fund owners.
Currently the Sector Model is above benchmark by 0.22 standard deviations. If it were 2 standard deviations above benchmark, I’d get concerned.  If it were 2 standard deviations below, I’d get excited. Now it’s… eh… slightly high, but nothing to panic about.
 
After the last two trades the Full Model owns 4 oilfield stocks and 1 coal stock. The Sector Model is in energy.
I’m in oil up to my eyeballs.
Mean reversion in oil would be a very good thing right now J.
 
Tim
 
 
 
 
 
 

Sunday, May 17, 2015

5/17/2015 Drill, Baby, Drill!


Sector Model
XLE
-2.41%
Full Model
Date
Return
Days
JOY
12/8/2014
-16.28%
160
AGCO
1/23/2015
15.79%
114
SSYS
3/3/2015
-44.71%
75
PWR
3/9/2015
4.77%
69
BHE
3/31/2015
-0.98%
47
CBI
4/2/2015
14.94%
45
MTZ
4/9/2015
-12.84%
38
HUN
4/28/2015
-2.37%
19
NE
5/7/2015
-2.68%
10
DRQ
5/15/2015
-0.31%
2
(Since 5/31/2011)
S&P
Annualized
12.20%
Sector Model
Annualized
21.29%
Full Model
Annualized
18.86%
S&P
Total
57.80%
Sector Model
Total
114.85%
Full Model
Total
98.27%
Sector Model
Advantage
9.09%
Full Model
Advantage
6.66%
Previous
2015
S&P
53.06%
3.10%
Sector Model
122.60%
-3.48%
Full Model
101.13%
-1.42%

 

The Full Model is recovering after I found and eliminated the source of the data error form Value Line.  My only conundrum is that the error keeps returning unless I delete and reload the program – even after deleting all artifacts from previous installations.

A most pernicious problem, but at least I know the gremlin is there and can kill it whenever I see the tell-tale signs of the error.

The Sector Model continues to waffle around its benchmark:



 

Not much to say about “normal.”  Normal is a good thing.

Energy is the call on the sector model, and the full model’s “ideal” portfolio is 70% in the oil industry!

Benchmark Electronics
BHE
ELECTRNX
Chicago Bridge & Iron
CBI
ENGCON
MasTec
MTZ
ENGCON
CARBO Ceramics
CRR
OILFIELD
Dril-Quip Inc.
DRQ
OILFIELD
Helmerich & Payne
HP
OILFIELD
Noble Corp. plc
NE
OILFIELD
National Oilwell Varco
NOV
OILFIELD
RPC Inc.
RES
OILFIELD
Superior Energy Svcs.
SPN
OILFIELD

 

I don’t rotate that aggressively, but if I were starting in cash, I’d have an extremely concentrated portfolio.

Tim