Aggressive, Backtested

August 20, 2008 – 6:35 am

Aggressive is a very low-beta, but very high-volatility, trading program for U.S.-market equities. Non-correlation and total return are valued by this system far more than reduction in volatility is, and the system was optimized with a specific, aggressive retail trader in mind (myself!).

The companies traded by Aggressive tend to be smaller in market capitalization than many investors might be comfortable with, although there is a minimum market capitalization for consideration ($100 million) in the portfolio. Further, the companies traded by this program tend to have a good deal of price momentum, and the program has a high turnover. Compared to the overall market, Aggressive expects to experience a more than 67% increase in variability of returns with a very large increase in total return, but the possibility of negative returns and significant drawdowns exists. Aggressive marches to its own drum; despite the increased variability of returns, market correlation (beta) is moderately low.

I’ve updated the “about” page for the system, to include its eleven-year backtest. This table shows the backtested results, including the 20%+ drawdown that the system is currently in. Click the chart for a larger view.

Aggressive system “about” page.

All posts, including current trades and results, for the Aggressive system.

If you liked this post, you might be interested in subscribing to my RSS feed. If you prefer, you can get a nightly RSS email update sent on the days that I post! There are convenient “Subscription” icons near the top of the right sidebar.

To view my actual trades and model portfolios for the different systems I track, visit The Rempel Report. 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, disclosing all results (good and bad) at regular intervals. I also track my personal portfolio, and disclose all trades before I make them. Members receive email notification of new posts and can contribute to the site through comments. Registration is still free!

By Bill | Posted in Specific Discussion of Trading Systems | Comments (0)

Fundamental Portfolio, Update and Backtest

August 18, 2008 – 6:25 am

I’ve updated the model portfolio changes for the Fundamental strategy; Fundamental is a moderately low-beta, moderately low-turnover trading plan for stocks traded on major U.S. exchanges, which takes its name because it does not reference any technical analysis factors or price ratios; it only has a minimum market capitalization of $1 billion for consideration in the portfolio. The plan uses growth in income and revenues, combined with measurements of earnings quality and financial stability, to pick companies that are traded on U.S. exchanges, from that group the plan buys the stocks that have the highest returns on equity. Stocks that meet the basic screening criteria are ranked by Return on Equity (ROE), and the highest-ranking qualifiers are then held.

I’ve also updated the “about” page for the system, to include its eleven-year backtest. This chart shows the backtested results, including the drawdown that the system is currently in. Click the chart for a larger view.

Fundamental system “about” page.

All posts, including current trades and results, for the Fundamental system.

If you liked this post, you might be interested in subscribing to my RSS feed. If you prefer, you can get a nightly RSS email update sent on the days that I post! There are convenient “Subscription” icons near the top of the right sidebar.

To view my actual trades and model portfolios for the different systems I track, visit The Rempel Report. 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, disclosing all results (good and bad) at regular intervals. I also track my personal portfolio, and disclose all trades before I make them. Members receive email notification of new posts and can contribute to the site through comments. Registration is still free!

By Bill | Posted in Specific Discussion of Trading Systems | Comments (0)

Scaling It Down

August 15, 2008 – 6:07 am

Yesterday I looked at the upper end of scalability, today I take a simple look at the lower end, again with my “strategy X.”

In the hands of a fund using all qualifiers, it holds 344 stocks on average, with 18% monthly turnover. Let’s say that, when holding only the top 20 stocks sorted by characteristic Y, “Joe Schmuckatelli, Retail Trader” experiences 25% monthly turnover in his account.

That’s 5 round trips a month, or 120 trades a year. If “Joe Schmuckatelli, Retail Trader” pays $10 per trade, that’s a $1,200 commission drag annually. Interesting, but useless out of context. More information is needed, such as the size of “Joe Schmuckatelli, Retail Trader’s” account, his tax rate, and the performance of the system.

Let’s say the system generates 15% average compounded annually – and that Joe could get 10% with very low volatility from a simple diversified buy+hold indexing across several asset classes.

Since tenure in this system averages under a year, let’s say “Joe” pays 25% of net in taxes.

Now let’s assume “Joe” has a $10,000 account – he would make $1500, pay $1200 in commissions, and be well behind buy+hold, even pretax.

With a $50,000 account, “Joe” makes $7500, pays $1200 in commissions and $1575 in taxes on the short-term gains, netting $4725, which is just below taxless buy+hold.

With a $100,000 account, “Joe” makes $15,000, pays $1200 in commissions and $3450 in taxes, netting $10,350 – just above what he could get from a taxless buy+hold.

There are lots of moving parts, not the least of which is that buy+hold isn’t taxless or commission-less; tax is deferred in some accounts, and is at the long-term capital gains rate, and there would be some expense for the reinvestment of dividends and initial buy-in. Also, one might take umbrage (I believe incorrectly so) with a low-volatility 10% average annual gain for diversified indexing across several asset classes. Finally, one can do better than $10 per trade on 120 trades/year.

The key points about scalability are: there are systems that can’t handle a lot of money, there are funds whose choices of method are hampered by their assets, and even retail schlumps need to pay attention to the scalability (down!) of their methods.

By Bill | Posted in Broad Discussion of Trading Strategies | Comments (8)

Hot Volume Turnovers and Scalability

August 14, 2008 – 6:04 am

In an effort to resolve the question mentioned yesterday, Testing for Scalability, I pulled a random sampling of U.S. stocks to look at their volume turnover rates.

I pulled the sample in different groups, with market caps above $10 billion, between $1 billion and $10 billion, and between $100 million and $1 billion. I then compared the daily liquidity (average (OHLC price) times shares traded) to their market capitalizations.

I found that the largest group, those above $10 billion in cap, tended to trade about 0.75% of their cap on a daily basis.

Those in the middle group, between $1 and $10 billion, had the highest turnover at about 1.25% of their cap, daily.

In the smallest group, those between $100 million and $1 billion, I found turnover of about 0.90% of their cap on a daily basis.

Therefore, given no cap bias towards any particular trading system, one could say that – generally speaking, of course – target stocks will turn over about 1% of their market cap daily.

Again, while this is a non-trivial and useful answer, it’s still incomplete. If one is interested in a system that is scalable to a particular number of stocks and turnover per period, one has to have a good idea of the percentage of total daily liquidity that, if exercised by one fund, will move the market disadvantageously.

Back to my example of strategy X holding 344 stocks with over $1 bil in cap, turning them over at 18% a month: how fast does that execution need to be?

The backtested results were done at zero slippage, so any execution lag could impact the result, and one assumes that it would be a deleterious impact. “Monday morning at open” is fine for a retail schlub grabbing 20 positions that max at 0.0001% of cap and about 0.01% of daily volume, but in the case of our fund, how big are those positions?

Running “only” $344 million, each position averages about $1 million dollars, and the minimum market cap is $1 billion. Executing the trade inside of one day implies occupying no more than one-tenth of the average daily liquidity, which, to my novice brain, seems imminently do-able. Also, the $1 billion is a market cap filter, with many of the stocks in the system – and the average market cap of its holdings – being larger. I would believe that a skilled day-trader, or prodigious computer algorithm, could accomplish that without moving the market overmuch. If we use that as our hypothetical ceiling, then …

Running “only” $3.4 billion, the fund is trading positions that run to a maximum of 1% of capitalization, and those positions would require 10 trading days – at most – to enter or exit.

Running “only” $7 billion, the fund is running into limiting cases where a stock might enter the list one month, and exit the next, and be at the minimum eligible market capitalization. In that limiting case, with trading at only one-tenth of average daily liquidity, the fund may spend a full month building a position only to turn around and liquidate that position over the next month. Note that the average tenure is about 5.5 months in our case (hypothetical 18% monthly turnover). Also note (again!) that the average cap size is going to be higher than the minimum cap size.

My amateurish take is that this hypothetical system is robust up to managing $1 billion in capital, unleveraged, and that past that point, execution of trades impacts profitability.

By Bill | Posted in Broad Discussion of Trading Strategies | Comments (2)

This Is What A Lack Of Accountability Looks Like

August 13, 2008 – 7:56 pm

Here’s a MyBlogLog page where a post about going long gold at $871.70 is shown. For those who may not be familiar with it, the MyBlogLog page shows community members, recent posts, and other information about sites maintained by members. Click thumbnails for full-size view. If you want to see the sites yourself, check using the url shown in the browser bar on the full-size view.

Here’s the page you get if you click the link from MyBlogLog. Check the url in the browser.

You get a similar page if you click his link on the Euro, from the same date.

As of today, the FXE is down -2.5% from that date, and the GLD is down -5.3%. As of this moment, his site is up and neither post exists on the blog, although you can see the posts shown after and before the gold and euro posts. My guess is that this turnip went heavily long both through futures contracts on high margin, got his ass waxed, and was too much of wuss to admit it. Since the whole “blowup video” thing had been done already, he just deleted the posts.

Icing on the cake … a comment on his Trading Video Post on August 4:

… I’m posting the comments because I’ve got bigger balls than you and I will admit when I’m wrong and I’m right.
RESPECT.

Which is, of course, why the post about going long gold is no longer available.

This is what a lack of accountability looks like, folks. Drink it in.

By Bill | Posted in Blogging About Blogging | Comments (5)