It’s A Tough Time To Be Aggressive

July 6, 2008 – 10:34 am

In its initial version, Aggressive was an equal-weighted portfolio derived from two different quantitative stock screens, based on companies that trade on U.S. exchanges. Each screen produced an exceptional trading plan by itself, but when the two were combined, the volatility of returns was reduced without much degradation of total returns. This was because their backtested, detrended equity curves have relatively low correlation. Through experimentation and backtest, I have found a simplified “one screen” method that produces slightly improved results, and in my opinion, simpler is usually better.

Information is as of the close on July 3, 2008.

Model Allocation

Based on beginning with a $100,000 portfolio at inception, the target allocation is a 10% weight in the top ten qualifiers. See my previous post on this system. The sort here is by ticker, and the portfolio weights are shown rounded to the nearest tenth of a percent.

Adams Resources & En (AE) 9.9% weight
BJ’s Wholesale Club (BJ) 12.1% weight
Companhia Brasileira (CBD) 10.2% weight
Chiquita Brands Inte (CQB) 6.0% weight
Corporate Express Nv (CXP) 10.2% weight
Fred’s, Inc. (FRED) 9.3% weight
Owens & Minor, Inc. (OMI) 10.6% weight
Stepan Co (SCL) 12.0% weight
Synnex Corp (SNX) 9.8% weight
Unifi, Inc. (UFI) 9.8% weight

Cash 0.1% weight

Returns

Based on beginning with a $100,000 portfolio at inception.

Equity: $93,332.42
Gain, Past 4 Weeks -7.37%
Gain, Year to Date -7.42%
Gain, Since Inception at 11/26/2008 -6.67%

One stock, OMI, in the Aggressive portfolio went ex-dividend in the past four weeks. Total dividends for the model portfolio were $44.80.

Chiquita Brands (CBD) is the biggest drag on the portfolio, accounting for about half of the fall in equity over the last four weeks.

Changes To Model Allocation and System Weights

Through experimentation and backtest, I have found a simplified “one screen” method that produces slightly improved results over the original blend of two screens. The new screen combines two momentum filters with a valuation sort order, holding the cheapest stocks that meet the momentum requirements. I have tested various holding counts and settled on the top ten for my model portfolio tracking. Counts of five through twenty were tested with robust results, the main response being a reduction in volatility as more stocks were held, but returns diminished slightly and transaction expense increased as well. The new model allocation is a 10% holding of each of the following stocks, sorted by Price/Sales ratio (ascending).

Adams Resources & En (AE)
Synnex Corp (SNX)
Industrial Distribut (IDGR)
Kroger Co. (KR)
BJ’S Wholesale Club (BJ)
Stepan Co. (SCL)
Finish Line, Inc. (T (FINL)
Saic Inc (SAI)
Crawford & Co. Cl ‘B (CRD/B)
Pharmerica Corp (PMC)

If this system were to be initiated today, the target allocation would be a buy for 10% weight holdings of each stock listed.

Tracking

Tracking is problematic this update, as one of the stocks held has stopped trading. Corporate Express Nv (CXP) is in the middle of an acquisition process, and as it is an ADR, the NYSE has decided to cease trading in the issue.

Until the acquisition closes, this position is “dead money.” The position is marked at the last trade price ($14.38) until such time as the situation changes. While the stock should be sold to meet the model allocation, it can’t be sold, so the position which should be added – but has the highest Price/Sales ratio – will be declined.

CBD, CQB, FRED, OMI, and UFI will be sold Monday morning, market at open. These sales, combined with accounting for the small cash position, account for 46.0% of the portfolio weight. The target allocations based for the new holdings will be 9.2% weights calculated on Friday’s closing prices, and shares of CRD/B, FINL, IDGR, KR, and SAI will be bought Monday morning, market at open.

Personal Trades

Rather than list my personal trades in a separate post, as I have done in the past, I’m going to mention them in the context of the system which is being traded. I am following the tracking portfolio for Aggressive in my personal account, with weights that might vary only slightly from the tracking weights.

Commentary

For those interested in a less diversified, more aggressive approach, holding only the top five from the previous list would provide that. I personally think there’s little to be gained in return, and a lot to be “gained” in terms of volatility, from that technique.

Here are the “next five” on the list, for those interested in holding a larger, more diversified set of risks:

Laclede Group Inc (LG)
Costco Wholesale Cor (COST)
UGI Corp. (UGI)
NN, Inc. (NNBR)
Wal-Mart Stores, Inc (WMT)

The most passive approach that could be taken with this screen is to view the list merely as interesting candidates for further evaluation. I prefer using other initial screens when taking this approach, however.

There is also an “active trader” approach that could be initiated with these lists. By keeping these stocks on a watch list and monitoring them for breakouts or “runaway” conditions, they could present day- or swing-trade opportunities for the trader who is capable of monitoring the markets intraday. For example, I might consider a day with range of double a recent average (20 day, perhaps) and a close high in the range, or a gap up, a “runaway” condition if volume were higher than a recent daily average and a new high were made. If I were trading this approach, I would set a tight initial stop based on a one- or two-day price low, and use a wide trailing stop to let the market run. If I were in such a trade during a switchover weekend like this one, I would continue holding with trailing and initial stops, letting any winners run.

If you’d like to become of member of The Rempel Report, you can register here. At The Rempel Report, I track model portfolios for four different mechanical trading systems, as well as my personal portfolio, and disclose all results (good and bad) at regular intervals. Members receive email notification of new posts and can contribute to the site through comments. Registration is still free!

By Bill Rempel | Posted in My Trades, Systems-Aggressive | Comments (0)

Mid-Year Wrap-Up

June 30, 2008 – 6:23 pm

These are my personal trading returns as of month-end June 2008.

Current Month Return: -7.5%
Year To Date Return: -4.5%
3 Month Return: 1.6%
6 Month Return: -4.5%
12 Month Return: -0.3%
24 Month Return: 11.2%
24 Month Annualized Return: 5.5%
36 Month Return: 51.5%
36 Month Annualized Return: 14.8%
Since Inception Return: 45.4%
Since Inception, Annualized Return: 12.2%

My last trades were mentioned here. This coming weekend will be the time to revisit those positions. The personal portfolio (tracking with the Aggressive system for the last few months) slipped on a Chiquita banana peel (CQB), down 35% since purchase.

Here are some numbers for the systems I track; all returns are net of dividends and transaction costs, assessed at $10 per trade:

Timing, starting with a hypothetical $100,000 in November of last year, had $101,333.64 as of the close of 2007. The current equity is $96,163.09, representing a YTD return of -5.10% and an inception return of -3.84%. I am not including returns from cash, as some followers of this system may instead use some alternative investments.

Fundamental, starting with a hypothetical $100,000 in November of last year, had $105,583.88 as of the close of 2007. The current equity is $96,931.04, representing a YTD return of -8.20% and an inception return of -3.07%.

Rotational, starting with a hypothetical $100,000 in November of last year, had $101,615.86 as of the close of 2007. The current equity is $109,346.87, representing a YTD return of +7.61% and an inception return of +9.35%.

Aggressive, starting with a hypothetical $100,000 in November of last year, had $100,807.71 as of the close of 2007. The current equity is $93,712.59, representing a YTD return of -7.04% and an inception return of -6.29%.

I’m not a big fan of relative benchmarks, but some readers are, so for convenience, here are some alternative returns.

SPY returns -11.60% YTD, including dividends.
DIA returns -13.45% YTD, including dividends.
QQQQ returns -11.67% YTD, including dividends.

If you’d like to become of member of The Rempel Report, you can register here. Members receive email notification of new posts and can contribute to the site through comments. Registration is still free!

By Bill Rempel | Posted in My Trading Returns, Systems | Comments (2)

Rotational Portfolio Loves This Market

June 29, 2008 – 12:59 pm

Rotational combines component rotation and asset class rotation to hold a small basket of ETFs or ETNs, selecting the handful with the most momentum from a representative sampling of classes and components. Throughout this article, when I refer to momentum, I am referring to an exponentially smoothed measure based solely on price movement.

Information is as of the close on June 27, 2008.

Model Allocation

Based on beginning with a $100,000 portfolio at inception, these are the current weights and holdings. The initial target was a buy of 10% weights per position. See my previous post on this system. Sort is alpha order by ticker and weights are rounded to the tenth of a percent.

Brazil (EWZ) 9.7% weight
Oil Equip/Srvcs (IEZ) 9.5% weight
Natural Resources (IGE) 8.8% weight
Oil Services (OIH) 9.2% weight
Energy Exploration (PXE) 9.1% weight
Russia (RSX) 8.1% weight
Steel (SLX) 9.7% weight
Natural Gas (UNG) 12.0% weight
Oil (USO) 14.1% weight
Materials (XME) 10.0% weight
Cash -0.1% weight.

Returns

Based on beginning with a $100,000 portfolio at inception.

Equity: $108,488.53
Gain, Past 4 Weeks: 2.49%
Gain, Year to Date: 6.76%
Gain, Since Inception on 11/19/2007: 8.49%

None of the ETFs in the Rotational portfolio paid dividends or distributions in the past four weeks.

Total dividends = $0.00 on the tracking portfolio. This amount is included in the returns shown above, and will remain in cash until needed for a new purchase. Note, commissions are expensed at $10.00 per trade when accounting for returns.

Changes To Model Allocation

Rotational screens for momentum inside a list of ETFs and ETNs by asset class category. The system is holding the top 10 issues, ranked by momentum, regardless of which asset class they are in or how much momentum they have.

If this system were to be initiated today, the target allocation would be a buy for 10% weight holdings of the ten issues highlighted in gold or green in the table below. Items highlighted in gray are “sells” from the existing model portfolio.

If the table is truncated in your browser, click on it to view it in its own pane. Depending on your browser, you may have to click again to view it in full size.

Tracking

Shares of RSX will be sold, market at open on Monday. The proceeds, plus cash, comprise 8.0% of portfolio weight, and will be used to buy shares of MOO based on the closing prices on June 27. I will round down any fractions in the share calculation.

Commentary

Below, I present the change in rotational momentum from the last evaluation to the current one. It can be quite instructive.

Here is a table that shows the average momentum for the different issues in each asset class, at different evaluation dates from the inception of the program.

Bonds, as an asset class on average, no longer have some positive momentum. The largest negative change is in international Treasuries, followed by corporate quality bonds and longer-duration (20+ years) and intermediate (7-10 years) U.S. Treasuries. Some bonds, like emerging market debt, still have positive momentum, but all classes have lost momentum over the last four weeks. The short term (1-3 years) U.S. Treasuries have basically zero momentum, and have lost momentum as well. The same dichotomy between rising long-term yields, often a sign of “inflation fears,” and the loss of momentum in precious metals, still exists.

Commodities as a class still have the most momentum, but are still losing momentum rapidly. Natural Gas, Agriculturals, and Oil are still gaining momentum, although Oil is barely gaining ground. All of the metals are continuing to lose momentum hand over fist. I would suggest that the gains are from structural or fundamental concerns about those assets, with little overt “inflation fear” – since the metals are falling in momentum, even if some of them still have positive momentum overall.

Currencies competing against the dollar dropped in momentum, although all but two still show momentum against the dollar. Interestingly, the “carry trade” tracker DBV has gained in momentum over the past four weeks, and is now in positive territory. It appears the carry trade has stabilized, as the DBV appears to be basing around $27. The biggest momentum loser is the Yen, although the Euro is the third-biggest momentum loser, perhaps suggestive of a worsening outlook for Europe relative to the U.S.

The foreign stock markets fell of the turnip truck this month, and are the biggest losers as a group. NO foreign market gained momentum over the last four weeks. Brazil and Russia are the strongest foreign markets.

The domestic industry groups faired better, even though they still lost momentum as a group. In terms of high momentum, it’s all about resources, with the strongest classes still gaining strength. However, the biggest momentum-gainers are in technology, not resources. Networking and electronics led the class. Banks and homebuilders were the biggest losers. Software, Semiconductors, and Networking are all in positive territory, and cyclical building stocks and retailers are in positive territory, as well. Staples, gold miners, and health care stocks are in the negative momentum. This is not a recession bet – this is an anti-Financials bet, as they are the dregs of the momentum class right now.

REITs took a step backwards, losing almost as much momentum as the foreign markets did, and having the worst momentum of any class. Residential and industrial/office REITs continue to hang around very close to positive territory, however.

While this has certainly been a tough market to call, it hasn’t seem to have bothered Rotational one tiny bit, as the program gained in equity over the last four weeks and is firmly in positive territory for the year to date.

If you’d like to become of member of The Rempel Report, you can register here. Members receive email notification of new posts and can contribute to the site through comments. Registration is still free!

By Bill Rempel | Posted in Systems-Rotational | Comments (1)

Fundamental Portfolio Holds Its Own

June 22, 2008 – 8:04 am

Fundamental is a moderately low-beta, moderately low-turnover trading plan for stocks traded on major U.S. exchanges. It focuses on providing above-market returns over the longer term while keeping a variability of returns that is similar to the market’s risk profile.

Information is as of the close on June 20, 2008.

Model Allocation

Based on beginning with a $100,000 portfolio at inception, these are the current weights and holdings. The initial target was a buy of 5% weights per position. See my previous post on this system. Sort is alpha order by ticker and weights are rounded to the tenth of a percent.

America Movil, S.A.B (AMX) 3.7% weight
Boeing Co. (BA) 4.4% weight
CF Industries Holdin (CF) 6.5% weight
Coach (COH) 4.5% weight
Graco Inc (GGG) 5.1% weight
Gilead Sciences, Inc (GILD) 5% weight
Graftech Internation (GTI) 5.1% weight
Herbalife Ltd. (HLF) 4.5% weight
International Busine (IBM) 4.9% weight
Kellogg Co (K) 5.0% weight
Royal Kpn Nv S/Adr (KKPNY) 4.5% weight
Landstar System, Inc (LSTR) 5.5% weight
Magellan Midstream Holdin (MGG) 4.6% weight
Netease.Com, Inc. (NTES) 5.1% weight
Southern Copper Corp (PCU) 5.0% weight
Polaris Industries I (PII) 5.0% weight
Partner Communications (PTNR) 6.2% weight
Terra Nitr Co Com Ut (TNH) 5.2% weight
Terra Inds Inc (TRA) 5.4% weight
Waters Corp. (WAT) 4.9% weight
Cash 0.1% weight

Returns

Based on beginning with a $100,000 portfolio at inception.

Equity: $100,784.62
Gain, Past 4 Weeks: 0.99%
Gain, Year to Date: -4.55%
Gain, Since Inception on 11/12/2007: 0.78%

The drawdown (reduction in equity from peak to trough, when a system or strategy is losing money) discussed in previous entries is back to the mid-single-digit level. Equity had gotten to within 4% of its highs from Dec 2007, but has fallen back to a 5.8% drawdown, similar to the 6.8% drawdown at the last update four weeks ago.

I am still concerned with the prior level of turnover in positions, which was higher than I expected, but may be due to the nature of this recent market correction. With the prior update, I have made some changes to the timeframes used to filter the earnings quality items in the screen, and I believe these will lead to lower turnover in the future. It has lead to lower turnover THIS week, as only four positions are changing over. It’ll be interesting to see if this continues.

The following stock in the Fundamental portfolio went ex-dividend in the past four weeks: K.

Total dividends = $30.38 on the tracking portfolio. This amount has already been added to the returns shown above. Dividends paid will remain in cash until needed for a new purchase. Note, commissions are expensed at $10.00 per trade when accounting for returns.

Changes To Model Allocation

Fundamental screens for stocks that meet basic criteria, such as earnings and revenue growth, earnings quality, and debt-to-capital rations, then ranks them by ROE to hold the top 20. As a result of this regular four-week evaluation, the portfolio is making the following changes.

Remove the following stocks from the list:

America Movil, S.A.B (AMX) 3.7% weight
Coach (COH) 4.5% weight
Graftech Internation (GTI) 5.1% weight
Netease.Com, Inc. (NTES) 5.1% weight

Including the cash percentage of 0.1%, this allows approximately 18.5% of the portfolio to be allocated equally to the new purchases, with a target of 4.6% of equity each.

Add the following stocks to the list:

Accenture Ltd. (ACN)
Aeropostale Inc (ARO)
Dell Inc. (DELL)
J Crew Group Inc (JCG)

If this system were to be initiated today, the target allocation would be a buy for 5% weight holdings of the twenty stocks listed in Model Allocation, with the substitutions listed above.

Tracking

Shares of the stocks listed above will be sold, market at open on Monday. Based on portfolio total value and closing prices on June 20, 2008, enough shares of the replacements to comprise a 4.6% each allocation to the portfolio will be bought, market at open on Monday. Since the portfolio has little room for full allocations, I will round any fractional shares down in the share calculation for buys.

By Bill Rempel | Posted in Systems-Fundamental | Comments (0)

Hammer Time For The Market

June 15, 2008 – 8:12 am

Timing attempts to provide market equivalent returns over the long term, with a substantial reduction in variability of returns. The two components of the Timing program are EZ+Macro and Fear/Greed. This system trades rarely and splits its allocations between ETFs tracking the S&P 500, the intermediate-term U.S. Treasuries, and cash.

System recap is presented first this week, followed by extended commentary and charts.

System Summary

Information is as of the close on June 13, 2008.

EZ+Macro

My charts are relatively wide, and this site is best viewed at 1280×1024. If the chart is truncated in your browser, click on it to view it in full size.

EZ Trend is still down. The divergence had been reversing as of the last update, but since then the difference between the averages has stabilized.

Macro Trend is still bullish for Treasuries. This comes into play only if the EZ Trend is not up. Note that this trend is certainly reversing at present.

Fear/Greed

The Fear/Greed model signaled a buy for the U.S. stock market in early November, and a sell in December, as the $VIX relative to actual volatility fell to a historically low level. For most of the last six months, the current level of sentiment, as measured by the $VIX relative to actual volatility, has been at levels historically associated with complacency. It has only been in the last month that the measurement is anywhere close to historical “norms.” In the scale of the chart, 80% of the readings since 1990 have been between the red and green lines.

Model Allocation

Based on beginning with a $100,000 portfolio at inception. The portfolio weights are shown behind the ticker symbol, and are rounded to the tenth of a percent.

S&P 500 SPDRs (SPY) 23.9% weight
iShares 7-10 Year Treasury Bond Fund (IEF) 25.5% weight
Cash 50.6% weight

Returns

Based on beginning with a $100,000 portfolio at inception.

Equity: $98,093.83
Gain, Last 4 weeks: -1.88%
Gain, Year to Date: -4.18%
Gain, Since Inception on 11/12/2007: -2.91%

These returns include the recent May distribution from IEF of $0.28 per share. This system has been approximately 50% allocated to cash since December 21, 2007, and I have not been including gains from cash interest in the returns.

Changes To Model Allocation

There are no changes to the model allocation since this previous message. It is listed below:

S&P 500 SPDRs (SPY) 25.0% weight
iShares 7-10 Year Treasury Bond Fund (IEF) 25.0% weight
Cash 50.0% weight

Tracking

There are no changes to track.

Commentary

My overall thesis, that the U.S. stock market has set up for an intermediate-to-long-term bottom, as discussed much earlier, has not changed. Keep in mind that the Timing system is mechanical, and will be tracked based on the signals it generates. The system went 50/50 stocks/cash on December 21, 2007, and then on January 18, 2008 went to 25/25/50 stocks/bonds/cash.

Reviewing last month’s summary opinion:

The best risk/return, although highest volatility, entry opportunities have passed; those were at the bottom in January and the retest in March. Today does not present as good an opportunity, because of some short- and medium-term “overbought” conditions. I suspect that the broad movement off of the retest in March will segregate itself by sector, with leadership emerging and some lagging sectors falling below their 50 day moving averages, and the index working off its “overboughtness.”

The short-term overbought condition resolved itself pretty quickly, with an immediate move down the next week. The medium-term overbought condition took longer to resolve, basically the full four weeks since the last review, and moved down further than I had thought probable, below the levels marked as possible support in the chart below. If the chart is truncated in your browser, click on it to view it in full size.

Despite the movement below possible support, the weekly chart has some signs of encouragement. Check out the hammer pattern, on high volume, which printed last week. If it holds, it will be a significantly higher low than in March or January, and many technical analysts will see that as confirmation of an uptrend.

This hammer pattern, which is really just a rejection of the lows following a downtrend, is repeated in several places, including many breadth measurements. Here is the hammer pattern executed on a chart of S&P 500 stocks trading above their 50-day moving averages; note my comment at the last update was that “the percentage of S&P 500 stocks trading above their 50 day moving averages is fairly high.” Keep in mind that there’s a HUGE difference between a good signal for initiating short positions, and a good signal of poor risk/reward for initiating long positions, and I see this breadth measurement being high as a sign of the latter, not the former.

Here’s the hammer pattern shown on a chart of S&P 500 stocks trading above their 200-day moving averages.

Summary

The bottom and retest, in January and March, were the best buying opportunities, although they would have been stomach-turning in volatility. The current situation, a pullback from an overbought position, followed by multiple hammers in weekly charts, represents a pretty strong opportunity for deploying capital into the market.

In regards to the Timing model portfolio, it will continue to follow its mechanical signals. If the price action proceeds as I anticipate, it will switch to a higher long percentage in the next few weeks, and will only move into its highest exposure if there is a significant spike in fear, which might actually be possible in the near future, given the vanishing of complacency which took place last month.

If you’d like to become of member of The Rempel Report, you can register here. At The Rempel Report, I track model portfolios for four different mechanical trading systems, as well as my personal portfolio, and disclose all results (good and bad) at regular intervals. Members receive email notification of new posts and can contribute to the site through comments. Registration is still free!

By Bill Rempel | Posted in Systems-Timing | Comments (1)