08/31/2014 Falling off of a cliff

Style Model	Large Value
Sector Model	XLF	0.47%
Large Portfolio	Date	Return	Days
TIVO	4/23/2014	16.74%	130
SHOO	4/28/2014	-2.80%	125
SR	6/2/2014	17.30%	90
CFI	6/9/2014	2.18%	83
RRD	7/21/2014	10.71%	41
CHFC	7/28/2014	1.03%	34
ESI	8/4/2014	-41.09%	27
BSET	8/11/2014	1.88%	20
STRA	8/18/2014	3.13%	13
PBI	8/25/2014	1.31%	6
(Since 5/31/2011)
S&P	Annualized	13.03%
Sector Model	Annualized	25.72%
Large Portfolio	Annualized	24.17%

 

Rotation: selling TIVO; buying CLF.

The Sector Model continues to beat both the S&P and the back-test benchmark:

 

That said, my focus is on the Full Model.  The returns for the Full Model are not supposed to be close – but substantially better – than the Sector Model.  The fact that it has NOT outperformed, but merely averaged 24% for the past 3 ½ years is because of uneven fundamental experiments.

The newest result of those experiments is a curious trade: CLF.

CLF has been falling off of a cliff for a good while now.  The chart is back down to its 2008 bear market lows.  Immediate fundamentals are skewed as well: high P/E and low return on Total Capital would scare Greenblatt away.

However, the earnings and profit margin are accelerating, and the current ratio isn’t so bad.  The price to book value is 0.52.

In other words, it has some signs of life, but in a worst case scenario, it’s worth even more dead than alive.

Eh, typical value play.  I’ll hold my nose when I buy it, though.

Tim

 

 

08/28/2014 Sector and Style Matrix

	Large Value	Mid Value	Small Value	Large Blend	Small Growth	Mid Blend	Large Growth	Mid Growth	Small Blend
Finance	1	2	3	4	5	6	7	15	17
Industrial	8	9	10	14	16	20	25	38	39
Utilities	11	12	13	18	19	21	26	44	46
Staples	22	23	24	36	37	40	52	65	66
Materials	27	28	29	45	47	53	61	70	72
Energy	30	31	32	48	50	54	62	73	75
Cyclicals	33	34	35	49	51	55	64	74	76
Healthcare	41	42	43	59	60	63	69	78	79
Technology	56	57	58	67	68	71	77	80	81

08/28/2014 Are We There Yet?

As I've noted several times over the past year or so, the long term and intermediate term regressions on the S&P would intersect around 2000 before the end of the year.

Here's the latest chart:

So, yes -- we are there.

What now?

I never ventured a guess before, and I won't now.

08/28/2014 Premarket Sector Update

Whipsawing continues.

Now in XLI -- barely.

08/25/2014 Sector Update

More whipsawing.

Now on XLF.

08/24/2014 How the Model works... and sometimes doesn't...

Style Model	Small Value
Sector Model	XLI	0.00%
Large Portfolio	Date	Return	Days
TIVO	4/23/2014	13.50%	122
SHOO	4/28/2014	-1.46%	117
SR	6/2/2014	13.92%	82
CFI	6/9/2014	1.06%	75
FRAN	6/16/2014	-4.69%	68
RRD	7/21/2014	7.77%	33
CHFC	7/28/2014	2.28%	26
ESI	8/4/2014	-37.88%	19
BSET	8/11/2014	-1.75%	12
STRA	8/18/2014	1.65%	5
(Since 5/31/2011)
S&P	Annualized	12.86%
Sector Model	Annualized	25.89%
Large Portfolio	Annualized	23.92%

 

Rotation: selling FRAN; buying PBI.

The Sector Model had a good week, in spite of the XLF miss during an XLI whipsaw (you’ll note that it has returned to XLI).

As I noted on the blog, Gold Coast Advisors' Sector Fund actually MISSED the whipsaw because it was signaled so close to the end of trading, and picked up about 1.2% that the model itself missed.

Since I only report the model’s behavior, I am not showing that 1.2% gain on this chart:

 

I trade my own funds in parallel to Gold Coast’s trades, and so my own live returns are reflected here.

Not a bad chart, even with the miss.

Just a quick note on how these models work:

Breadth, volume, and price normally go together.  Momentum strategies invest when all three agree.  Mean reversion strategies invest when they do not agree.

As I said, I have a mean reversion strategy.  When the breadth and volume in a sector are outperforming price, I invest in the sector with the greatest long term divergence.

I’d try to make it sound more complex than that, and I’m always tinkering under the hood – but that disconnect is the heart and soul of the model. Majority vote between breadth, volume, and price, usually wins.  Occasionally price is right and breadth and volume collapse, but it works out in my favor more often than not.

Since I don’t follow momentum, I will NOT be in the greatest performing sector at any given time.  I just need to outperform the median for the market as a whole.  A black box algorithm may outperform by 30-40%.  I’m content with 20%.

I’ve tried to get greedy with the Full Model, to juice the returns through fundamental selection.  Most of my experiments have been abject failures – but 24% returns for the Full Model is the kind of “failure” that leaves you still kicking to experiment another day.

Interestingly, the goal has always been to outperform the Sector Model, which is the benchmark for the Full Model.

And to that goal I continue to work.

But the Sector Model – the technical core – keeps the Full Model afloat until I can find that sweet-spot between Technical and Fundamental indicators that allows them to work together, instead of against each other.

As for the trades, I’ll set limit orders over the weekend and let the trades strike at some point during the week.  For a sell, I’ll add 0.2% to Friday’s close.  For the buy, I’ll add 0.1%.

If there is a large shift in the futures, I’ll add the futures to Friday’s close and recalculate the limits accordingly.  So a 0.7% gain in the futures at 6am on Monday would leave me with Friday + 0.9% for the sell and Friday +0.8% for the buy.

Then I walk away.

The market would drive me crazy if I didn’t have the model to calculate for me.

In short:

Don’t get greedy, and don’t obsess.  Those black boxes out there are designed to play with your brain.  Ignore them.

Live!

Leave the black boxes to fight each other, and the leave psychiatric meds for the day traders.

Tim

 

 

08/22/2014 Before the open

The Sector Model flipped back to XLF before the close yesterday.

The Sector Fund managed by Steve Cohen at Gold Coast Advisors actually missed the whipsaw into XLI and picked up an extra 1.2% by holding XLF through the day.

Happy accidents sometimes happen...

08/20/2014 Sector Update

The Sector Model has dipped slightly -- slightly -- in favor of Industrials (XLI):

	Small Value	Mid Value	Large Value	Small Blend	Small Growth	Mid Blend	Large Blend	Large Growth	Mid Growth
Industrial	1	4	7	10	13	20	24	49	66
Finance	2	5	8	11	14	21	25	51	67
Utilities	3	6	9	12	15	22	27	52	68
Staples	16	17	18	23	29	47	50	65	75
Cyclicals	19	28	33	36	41	55	57	70	77
Healthcare	26	32	37	39	44	58	60	72	78
Energy	30	34	38	42	45	61	63	73	79
Materials	31	35	40	43	46	62	64	74	80
Technology	48	53	54	56	59	69	71	76	81

This is neither bullish nor bearish.  XLI is actually typical of a mid bull correction, but the weight of both sector and style models is in a late bear.

More QE confusion.  It was confusing going in, and it's confusing going out.  Hooray for Jackson Hole.  I hope we'll have an end to all this soon.