The issues with back testing a short stock strategy

I have been shorting stocks since 2006 using a quantified strategy that has remained relatively unchanged through the years. From 2006 to 2012, the strategy was one of my most consistent and profitable of all the strategies I have traded. I love shorting stocks because it is very hard psychologically, because of that, I believe that there is a good edge there. The test results have always bothered me because of the differences between back tested assumptions that sometimes are challenging to actually reproduce in real-world trading. Then in 2013 my fears became realized and all four fears below really hit me.

Continue reading

Intermediate Term Stock Rotation Strategy Using S&P500 Stocks

One of my research goals for this year is to find an intermediate term rotation strategy using S&P500 stocks. Then right on cue, I read the following post Intermediate momentum! which points to  research Is momentum really momentum? by Robert Novy-Marx. In that he mentions that “intermediate horizon past performance, measured over the period from 12 to seven months prior, seems to better predict average returns than does recent past performance.” I have never tried an idea like this. In the blog comments, a user says he got great results using the current NDX100 stocks not the historical. This introduces pre-inclusion bias but maybe the results will still be good. What a great way to start the year with ideas I have never tested.

Continue reading

Stop Losses and Equity Curves

This extended research is from two readers’ requests. Request one is adding stop losses on the “Monthly S&P500 Stock Rotation Strategy.” Request two is seeing the equity curves from “Percent S&P500 Stocks Trading Above MA50 as Market Timing Indicator.”

Continue reading

Monthly S&P500 Stock Rotation Strategy

From the “Should You Buy the Best or Worst YTD Stocks” post, several readers made comments if one could make a monthly rotation system from this idea. From that post, buying either the strongest or weakest stocks out-performed the SPX with the weakest giving the best results. Will that be the case again?

Continue reading

Percent S&P500 Stocks Trading Above MA50 as Market Timing Indicator

Does the percent of S&P500 stocks trading above their 50 day moving average predict future market returns? Over the last several weeks, I have seen several charts of the percent of S&P500 stocks trading above their 50 (or 200) day moving average overlaid on the S&P500. From these charts, it appears one could build a market timing indicator. The concept really looks like it has promise.

Chart from April to November 2013.

Continue reading

Should You Buy the Best or Worst YTD Stocks

Is it better to buy the worst year-to-date performing stocks or the best year-to-date performing stocks for the month of December? Common wisdom would say stay away from the losers because those are the one that people are selling for tax reasons. Are fund managers buying the winners for window dressing?

Continue reading

SPX Closes Above MA10 For 15 Days

As of Friday’s close, the SPX has closed above its 10 day moving average for 17 days. What does the market do when it finally closes below the MA10? Which S&P500 stocks do we want to focus on when it finally does?

Continue reading

Is mean reversion dead – reader suggested research

Continue reading

My quest to find the best performing S&P 500 stocks after several up days

In the previous post “Which S&P500 stocks to focus on when the SPX has 5 higher closes,” we discovered which stocks (from the S&P 500) produced the best returns when the market closed higher five  consecutive days . The results from that work, as often happens, suggested a deeper look; specifically, can those concepts be applied to S&P 500 stocks without having to wait for specific market conditions (e.g. five up days in the SPX)? If so, maybe this is the start of a viable, standalone trading strategy. As indicated, this post builds on the previous post, so please refer as needed.

Continue reading

Which S&P500 stocks to focus on when the SPX has 5 higher closes

Rob Hanna had a good post recently; titled What the String of 5 Higher Closes Under These Circumstances is Suggesting .  With mean reversion trading, you are expecting stock prices to snap back towards their mean, like a rubber band stretched too far.  But, sometimes, that rubber band can be stretched so far that it breaks (and therefore, won’t snapback).  For some time, I have been searching for how to tell when that rubber band is stretched so far that it is broken.  Rob’s post had several key concepts that might help us to solve this puzzle and possibly even be the foundation of a stock strategy.

Continue reading