Subject: Re: Chart: timing with Nas100 RS screen
I've been trying to boil this thread down to something I understand and can calculate on my own using BarChart and Stockcharts websites.
Could I get a reality check? - Does the below seem reasonable or am I missing something important?
{8 rules}
IMHO, this is way over-tuned. I became sensitized to overtuning in the early years of TMF and Mechanical Investing, when many of the screens that backtested great failed miserably after the were published. The more rules there are and the more fine-tuned the rules were, the more likely that the rules were tailored to fit just the data they were trained on.
One thing that we tried to avoid this was to divide the historical data in half and apply the rules to each half, to see if there any major difference. Or, as I did, apply the rules to separate 5-year and 10-year data.
This comment here: "I am constantly trying to improve the strategy." makes me fear that this overtuning is going on.
"Simple is better, because simple is more robust."
"In uncertain environments, simple heuristics tend to be more robust than complex decision rules. And markets are very, very uncertain."
"The best systems are simple, and for good reason. Complicated systems have more opportunities for failure." -- Scott Adams
Okay, my thoughts:
Timing should not be a major part of the screen. It is well known that timing is to reduce the volatility (standard deviation) and avoid the huge drawdowns. Timing almost always also reduces the CAGR. A good timing scheme lowers the stdev more than it lowers the CAGR (percentage wise). Reducing the stdev by 10% while the CAGR is reduced by only 5% is a win.
I don't see 9 month momentum being better than 12 month momentum.
GTR1 shows 9 month as 18.0% CAGR and 12 month as 24.6% CAGR.
12 mo: https://gtr1.net/2013/?~Nasdaq...
9 mo: https://gtr1.net/2013/?~Nasdaq...
Of course, this depends on the GTR1 database being accurate. I have been assured that it is.
Also, the data for 12 month momentum is widely available. 9 month, not so much. AFAICT, you'd have to compute it yourself. You can using Yahoo data but it is a lot of work.
Here is one source, and you don't even have to log in. https://www.barchart.com/stock...
The two screens have a large overlap, which makes sense because they are just two different ways of measuring essentially the same thing -- the momentum over the last 9 or 12 months. Owning the overlaps is basically just doubling down on a few of the highest ranked stocks. You wouldn't want to do that as the only strategy -- too risky.
For timing, I think that SPY is not the best index to use. It is quite a different universe than the Nasdaq stocks. My timing backtest says that ^IXIC (ETF: ONEQ) works better than SPY.
My timing backtests with SMAs of 10, 12, and 15 months showed that 12 months ws best overall.
REMEMBER: The purpose of timing is *not* to improve the CAGR, it is to mitigate the downturns.
I don't think the exact day-of-month to trade makes a significant difference. Likewise the short-term vs. long-term average trading volume.
If you look at GTR1's detailed CAGRs, you will see that it varies greatly depending on the exact start date in the cycle. For the 9-month momentum the CAGR ranges from 16.0% to 19.4%. Any tweak that raises the average CAGR from, say, 18% to 18.5% is just random noise. The CAGR you would actually get could be anywhere from 16% to 19%.
"Using stops is 10th grade risk management." The timing on a simple monthly basis is all you need. Fine-tuning it has almost no effect, it just adds complexity.
This screen has a very large turnover. Most of the realized gains will be short term, so it is best to do it in an IRA or Roth.
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What's left?
* Once a month, somewhere near the end of the month, rank the Nasdaq 100 stocks by the 12 month momentum (either straight RS or price/(52wk HI + 52wk LO).
* Sell the ones that have fallen out of the top N.
* Use that money to buy equal shares of the ones that you don't have.
* But first, check the timing rule. If it says to get OUT, sell everything and switch to a short-term T-bill ETF.
* If you want, run one portfolio in two accounts, each using a different momentum type.
* Once those portfolios have done good, gild the lily and run an "overlap" portfolio in another account.