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Issue No. 57 – December 19, 2005 Prescott, Arizona Systems@WiserTrader.com
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1.0 Trading
As more analysis is done on the 1 year performance of stocks that have been screened using our favorite filters, a picture begins to develop.
1.1 Absolute Value Filter and S&P 500
Results have been reported over the past few months on the 1 year behavior of stocks that have been screened using several stock filters. Stocks have been grouped into 3 growth stock categories ($4 to $15, $15 to $40 and above $40) and two value stock categories (absolute value metrics and industry relative metrics). These filters are described on the website.
Recently it was shown how growth stocks priced above $40 performed about as well as value stocks over the past year. Growth stocks price from $4 to $15 performed poorly and were dropped from the study. Growth stocks price from $15 to $40 performed about two thirds as well as value stocks over the past year.
The most impressive result has been the relative ineffectiveness of trailing stops in preserving capital and improving returns on capital for market conditions defined in terms of the S&P 500 Index over different 1 year periods described in Table 1.
Table 1
Filter Performance versus the S&P 500 Index
Using No Trailing Stop
|
Date Range |
S&P 500 |
Growth $15-$40 Filter |
Growth >$40 Filter |
Absolute Value Filter |
|
9/04 to 9/05 |
8.5% |
|
|
29% |
|
11/04 to 11/05 |
4.0% |
19% |
29% |
|
|
12/9/04 to 12/9/05 |
6.0% |
|
|
21% |
© 2005 Desert Mountain Systems, LLC. Members of wisertrader.com are neither licensed brokers nor licensed advisors. Trades discussed represent recommendations made by the editor for the wisertrader.com portfolio. The newsletter and web site are for information only and should not be considered as personal advice. While it is believed that the posted information is factual, mistakes can be made in transcription. Investors should trade stocks only after verifying all information and consulting with a licensed broker or adviser. Desert Mountain Systems markets third party trading systems but has no other affiliation with trading system companies.
Closer attention to detail reveals that absolute value filtered stock gains were reduced 25% when the S&P 500 gains were reduced from 8.5% in the September ’04 to September ’05 time frame to 6% in the December ’04 to December ’05 time frame. For the latter time frame Table 2 shows that a 20% trailing stop begins to have a noticeable effect, although still not very significant.
Table 2
Effect of Trailing Stop on Absolute Value Filter
December ’04 to December ‘05
|
Stop Loss Setting (%) |
Average Gain reached Using Stop |
Month that stop was triggered |
Percent stopped out |
Percent that Gained |
|
10 |
6.5% |
3.5 |
66.7% |
77.8% |
|
15 |
7.4% |
4.0 |
44.4% |
55.6% |
|
20 |
23.4% |
6.0 |
33.3% |
77.8% |
|
25 |
21.2% |
7.0 |
33.3% |
77.8% |
|
30 |
21.2% |
7.0 |
33.3% |
77.8% |
|
35 |
20.9% |
9.5 |
22.2% |
77.8% |
|
40 |
21.4% |
8.0 |
11.1% |
77.8% |
|
50 |
21.4% |
8.0 |
11.1% |
77.8% |
|
60 |
20.5% |
10.0 |
11.1% |
77.8% |
|
70 |
20.9% |
none |
0.0% |
77.8% |
|
80 |
20.9% |
none |
0.0% |
77.8% |
|
90 |
20.9% |
none |
0.0% |
77.8% |
|
100 |
20.9% |
none |
0.0% |
77.8% |
It also has not escaped notice that the performance of the two remaining growth filter categories performed pretty well for the amount of S&P 500 gain over the November ’04 to November ’05 period. As these studies continue a more apples to apples comparison must be done in order to really compare the two growth filter categories with the two value filter categories of stocks.
Based on existing data, however, as gains for the S&P 500 Index dropped below about 6%, over the past year, the use of a trailing stop became more effective in preserving capital for absolute value filtered stocks. When the S&P performance was 8.5%, trailing stops were actually detrimental to profits.
As these studies continue, more S&P 500 data points can be compared to growth and value filter performance data points and a comprehensive picture can be developed that has statistical significance. While it must be remembered that past results are no guarantee of future performance, the fact that the data are just 1 year old lends some degree of validity to judging recent trends in market sentiment and gives a degree of confidence on how these filters have performed in the recent past. Experience is everything.
2.0 Market Analysis
Major indices continued their sideways movement for the third week. This consolidation appears to be profit taking, in part due to memories of the sell off with reduced volume that occurred a year ago last January. A change in the FOMC policy statement, as to whether the end of the rate tightening period is near, was fully expected and had little impact. The VIX and VXN have moved back below their 20 day simple moving averages.
Key industry ETF’s in Table 2A are Biotech and Semiconductors which confirm the NASDAQ. Transportation confirms the Dow Jones Industrial Average according to Dow Theory. Banking and Financials are confirming indicators for the S&P 500. Gold and Real Estate are respective indicators for the inverse health of the currency (inflation) and the capacity for consumer spending.
Table 2A
Indices, Key Industry ETF’s and Sector SPDR’s
|
|
1 month |
1 wk ago |
2 wks ago |
3 wks ago |
4 wks ago |
|
Dow Jones Industrials |
1.0% |
0.9% |
-0.9% |
-0.5% |
1.5% |
|
NASDAQ |
1.1% |
-0.2% |
-0.7% |
0.5% |
1.6% |
|
S & P 500 |
1.5% |
0.6% |
-0.5% |
-0.2% |
1.6% |
|
Russell 2000 |
1.6% |
-0.8% |
-0.3% |
1.0% |
1.7% |
|
GLD, GOLD |
3.4% |
-4.4% |
4.1% |
1.8% |
2.0% |
|
RKH, Banking |
2.2% |
1.5% |
-0.5% |
-1.2% |
2.4% |
|
IYT, Transportation |
0.0% |
1.0% |
-0.9% |
-0.9% |
0.8% |
|
SMH, Semiconductors |
4.3% |
0.3% |
-2.5% |
3.9% |
2.7% |
|
BBH, Biotechnology |
-4.5% |
-1.5% |
-2.3% |
-0.4% |
-0.3% |
|
IYR, Real Estate |
1.9% |
0.6% |
-0.7% |
-0.5% |
2.5% |
|
OIH, Oil |
8.6% |
-2.3% |
3.3% |
1.6% |
6.0% |
|
XLE, Energy |
4.1% |
-1.4% |
1.3% |
0.3% |
4.0% |
|
XLU, Utilities |
3.7% |
1.0% |
1.4% |
-0.6% |
1.9% |
|
XLB, Materials |
1.7% |
-1.4% |
0.3% |
1.4% |
1.4% |
|
XLI, Industrial |
1.2% |
0.7% |
-0.8% |
0.3% |
1.0% |
|
XLK, Technology |
0.1% |
-1.1% |
-0.9% |
0.7% |
1.4% |
|
XLV, Healthcare |
1.4% |
1.6% |
0.1% |
-0.3% |
0.0% |
|
XLF, Financials |
0.9% |
0.3% |
-0.7% |
-1.0% |
2.4% |
|
XLP, Consumer Staples |
1.7% |
1.9% |
-0.7% |
-0.7% |
1.3% |
|
XLY, Consumer Discretionary |
0.7% |
0.1% |
-0.7% |
-0.3% |
1.5% |
