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- Manlobbi
Investment Strategies / Mechanical Investing
No. of Recommendations: 13
A paper out this summer looking at industry momentum over 98 years that starts by using Keltner channels and Donchian channels. FWIW, the 99-day strategy uses Donchian channels
A Century of Profitable Industry Trends
Zarattini and Antonacci
https://papers.ssrn.com/sol3/papers.cfm?abstract_i...Abstract:
This paper evaluates the profitability of an industry-based long-only trend-following portfolio. Utilizing 48 industry portfolios from 1926 to 2024, our analysis explores the model's profitability over a century, highlighting its adaptability and effectiveness across diverse market epochs. We assess the overall profitability of the model and examine the distribution of long-term returns and associated risks. Our analysis includes the impact of individual industry contributions on overall portfolio performance, focusing on the frequency and average profitability of trades at both the portfolio and industry levels.
The Timing Industry strategy achieves an average annual return of 18.2% with an annual volatility of 12.6%, resulting in
a Sharpe Ratio of 1.39, compared to the US equity market's 9.7% return, 17.1% volatility, and 0.63 Sharpe Ratio. The model's outperformance is underscored by an annualized alpha of 10.9%, with the timing strategy reducing drawdown by almost 60% compared to a passive long exposure. Further investigations reveal the active strategy's ability to fully participate during market upswings while significantly limiting exposure during downturns.
In the final section, we introduce 31 sector ETFs provided by State Street Global Advisors and backtest the same trading methodology over the last 20 years. The ETFs successfully replicate the model's exposure and returns. We also assess the impact of commissions and slippage, demonstrating that the active timing strategy remains largely profitable even with high trading costs.
DB2
No. of Recommendations: 2
As I recall we tried that strategy using Fidelity select industry funds, and it failed.
No. of Recommendations: 1
As I recall we tried that strategy using Fidelity select industry funds, and it failed.
As the paper was written in June, how do you know that it has failed?
DB2
No. of Recommendations: 2
We had a pretty sophisticated strategy using trend following and Fidelity Select Industry funds, and it did not work.
I am basing it on that.
No. of Recommendations: 2
The article says using State Street ETFs in the last 20 years would have underperformed the S&P on a return basis, but outperformed on a risk-adjusted basis with 1/2 the worst drawdown.
No. of Recommendations: 9
Here's the last 10 years of the strategy as reported in the paper, versus holding SPY (SPY annual returns from Yahoo finance).
Year Strat SPY Strat Port SPY Port
$10,000 $10,000
2014 -5.2 13.5 $9,480 $11,350
2015 -10.8 1.25 $8,456 $11,492
2016 4.6 12 $8,845 $12,871
2017 36 21.7 $12,029 $15,664
2018 -7.5 -4.6 $11,127 $14,943
2019 13.6 31.2 $12,640 $19,606
2020 19.9 18.4 $15,156 $23,213
2021 10.3 28.8 $16,717 $29,898
2022 -9.1 -18.2 $15,196 $24,457
2023 12.8 26.2 $17,141 $30,865
Apologies if the formatting is a bit off in the table above, but you can see that holding SPY for the past 10 years has been hard to beat. I'm stating the obvious to members of this board, but when it comes to following a momentum system, simply using SPY (momentum based on market cap of US companies), has been difficult to beat - at least it sure has for me. Will that continue to be the case? It's hard to tell, but... certainly with all the index investing that is done these days, one could argue that SPY has a tailwind just from that alone.
Like many others on this board, I've put a lot of time and effort into trying to find strategies that would beat something like SPY - you have some winning years and think you're onto something, then you have some losing (to SPY) years and start to question whether or not you were fooled by randomness.
Investing suffers from the rather strange phenomenon where expending more effort does not necessarily lead to better results. In most things we do in life, when you put more effort into something, you experience improved results. With investing, that's not always clear. Certainly the obvious things (that many don't do!) help results (regular saving, asset allocation, etc.), but you start to get into very specific strategies around market timing or stock/ETF picking, then... it's much tougher to say.
I have to routinely remind myself that when you get into market strategies, you're not playing against the "average investor" out there - you're playing against people that look for market edges as a full-time job, who have time to build all types of models, collaborate with other sharp minds, etc. As a long-time mediocre 5k runner, if I went out and thought I was going to compete with the UCLA cross-country team, I'd know without question that I was going to get beaten (and badly). As an investor, I'm also competing with hedge funds, thousands of analysts, etc. - the odds of beating them (with any level of consistency)... are likely not great, if I'm totally honest with myself. Just felt like saying this - as it's been on my mind a lot lately!
Lee
No. of Recommendations: 3
if I went out and thought I was going to compete with the UCLA cross-country team, I'd know without question that I was going to get beaten (and badly).
The strange thing about investing is that so many smart guys who make their living studying the market full time lose the race. Maybe that's because there's no finish line, just one of those mechanical rabbits...
Yet anybody who wants to can just ride the rabbit!
Baltassar
No. of Recommendations: 4
The strange thing about investing is that so many smart guys who make their living studying the market full time lose the race. Maybe that's because there's no finish line, just one of those mechanical rabbits...
I also think that you hear about the handful of people that do make money: a) only do well part of the time and b) tend to lose (to the market) more than they make (or at least more often). It's well documented, particularly in the retail community, that most people lose to the indexes. Then just look at all the funds that die a quiet death because they can't compete with passive index (largely momentum) investing.
Lastly, the edges that are discovered that are real, are *very* quickly bet on by a number of people. And about the time the edge is discovered, it's quickly arb'd away. And in all too many cases turns into a net loser.
Riding the rabbit... I do like the analogy. Unfortunately, when you just "ride the rabbit", it's not quite as entertaining! When I buy SPY these days, I'm telling myself I'm a mechanical investor - largest 500 US companies by market cap that have some earnings, readjusted on a quarterly basis (If I remember correctly when they adjust the index), and weighted by market cap. It doesn't get much more mechanical or simple than that. But it's boring - and you convince yourself that you can do better because all you're doing is sitting there year after year... :-) Now I'm repeating myself...
Lee
No. of Recommendations: 0
Investing suffers from the rather strange phenomenon where expending more effort does not necessarily lead to better results. In most things we do in life, when you put more effort into something, you experience improved results. With investing, that's not always clear. Certainly the obvious things (that many don't do!) help results (regular saving, asset allocation, etc.), but you start to get into very specific strategies around market timing or stock/ETF picking, then... it's much tougher to say.
I have to routinely remind myself that when you get into market strategies, you're not playing against the "average investor" out there - you're playing against people that look for market edges as a full-time job, who have time to build all types of models, collaborate with other sharp minds, etc. As a long-time mediocre 5k runner, if I went out and thought I was going to compete with the UCLA cross-country team, I'd know without question that I was going to get beaten (and badly). As an investor, I'm also competing with hedge funds, thousands of analysts, etc. - the odds of beating them (with any level of consistency)... are likely not great, if I'm totally honest with myself. Just felt like saying this - as it's been on my mind a lot lately!
I don't agree 100% with this. I find it easy to beat the fixed income market using preferred stocks, and closed end bond funds. For stocks, it is admittedly very hard. I think if you do things like using puts and calls along with your stocks, and buy DITM leaps, it is possible to beat the market, although still very hard.
No. of Recommendations: 14
Apologies if the formatting is a bit off in the table above, but you can see that holding SPY for the past 10 years has been hard to beat. I'm stating the obvious to members of this board, but when it comes to following a momentum system, simply using SPY (momentum based on market cap of US companies), has been difficult to beat - at least it sure has for me. Will that continue to be the case? It's hard to tell, but... certainly with all the index investing that is done these days, one could argue that SPY has a tailwind just from that alone.
I think it's worth considering that there are strong bull markets, and there are other times. In strong bull markets, the S&P is nearly impossible to beat and there is no real point in trying. At other times, the S&P can be much easier to beat, and it's that much more important to do so as the S&P isn't doing so well. We have had a huge bull market lately and the super-big-caps have dominated, so the index has been a very tough target, matching your experience. BUT...this too shall pass, I believe.
It could be worthwhile to think about ways to determine, in broad stroke fashion, whether or not you're in an ongoing strong bull market. Try fancy stuff only when that isn't clearly the case? You tend to see one situation or the other for years at a time.
As for trying to beating the S&P, even when it's doing well, the LargeCapCash screens are doing not so badly so far. I originally suggested, and track, Value Line versions, with a few variations. Here's one with a tiny bit of momentum, mainly "eliminate the worst" at the beginning. Created on data up to April 2020.
* Price / 52 week high top 50%
* ROE top 30%
* (Cash - Long Term Debt) top N
The original method was to run it with two month holds, top 40 hold-till-drop at 45. Run that way with 0.4% round trip friction, this has returned 24.8% in the first 4.25 years post discovery, beating the S&P by 5.87%/year. It has beat the S&P in 84% of rolling years in that post-discovery test. I very much doubt it will continue to lead by that much, and there will certainly be times that it lags the index for a while, but at least is isn't over cooked and seems to offer the *chance* of beating the index. I'm running something very similar to this with real money. One nice thing is that it scales well: almost all the picks are very large cap, and the turnover is very low, and the risk (single-stock exposure) at 2.5% of the portfolio is considerably lower than for the S&P at 7%. Since the final sort is on the absolute size of the (net) cash pile which happens only at large firms, the top picks from a recent month are the usual suspects: GOOG, MSFT, META, TSM, NVDA...
Jim
No. of Recommendations: 0
Jim, thanks for this wonderful screen. Would you rebalance every 2 month, once per year or not at all? If one would only be able to invest in a smaller number of symbols, how many would you consider as a minimum? Sorry to ask you these questions. Unfortunately I have no access to VL anymore.
Thanks for all your enlightening postings
Hittfeld
No. of Recommendations: 2
I don't agree 100% with this. I find it easy to beat the fixed income market using preferred stocks, and closed end bond funds.
Would you be willing to share any links and/or a summary on what you do with those? I've also dabbled a bit in preferred stock ETF's, but don't always feel like the risk I'm taking is necessarily compensated with the reward.
Appreciate the counter-argument (I try to be open!) that both you and Jim make in terms of finding an edge. Like a few others have mentioned, I'm just dealing with losing to SPY right now (and have been for a while), so it's that much easier to question whether I've just been lucky when I did manage to beat the market!
Really appreciate the insights and commentary I've learned from the members of this board over the years!
Lee
No. of Recommendations: 4
For preferreds, it used to be that the site CDX3 was the place to go. Then he skyrocketed the subscription fee and then closed down.
However, he did release the last edition of his book for free download.
https://www.preferredstockinvesting.com/v5/pages/b...When the Fed dropped interest rates to zero, that killed preferred investing. It is starting to pick up now.
Ah, preferred stock ETFs are no good.
No. of Recommendations: 10
Jim wrote:
I think it's worth considering that there are strong bull markets, and there are other times. In strong bull markets, the S&P is nearly impossible to beat and there is no real point in trying.It is not often that I dare disagree with the mighty Mungofitch! :) But in this case, let me propose that it isn't actually as difficult as one might think.
Back in 2000 or so I realized that once in a while the market dishes up some amazing opportunities that can be pretty easily identified by marking points of investor capitulation. After a decade of study (1990s) I narrowed it down to a few values that do this best, and some of those I've posted on the MI board over the years. These extreme points of capitulation tend to propel the market forward for a significant period of time. What I've found best in ending those periods of strongly bullish markets are economic indicators such as the monetary rate, inflation rate, and similar. Indicators like the Bear Catchers are also employed for this purpose. In those cases I just go to CASH and wait for the next opportunity. This results in being invested about 80% of the time and in CASH the rest.
This results in just two years when the S&P 500 beats out the system based on a period of thirty-five years. I've marked those two years in bold. It is also important to choose what to invest in during the strongly bullish periods. In most cases over this 35 year time period it has been tech - e.g., Nasdaq 100 or similar.
Zee System S&P 500
Years ROI ROI
1990 45.28% -6.56%
1991 112.55% 26.31%
1992 -2.18% 4.46%
1993 10.00% 7.06%
1994 1.20% -1.54%
1995 37.58% 34.11%
1996 23.03% 20.26%
1997 33.50% 31.01%
1998 118.52% 26.67%
1999 148.13% 19.53%
2000 29.60% -10.14%
2001 220.22% -13.04%
2002 42.65% -23.37%
2003 85.06% 26.38%
2004 14.58% 8.99%
2005 2.12% 3.00%
2006 9.82% 13.62%
2007 4.91% 3.53%
2008 2.03% -38.49%
2009 151.62% 23.45%
2010 26.87% 12.78%
2011 22.22% 0.00%
2012 31.47% 13.41%
2013 49.15% 29.60%
2014 13.67% 11.39%
2015 1.31% -0.73%
2016 29.95% 9.54%
2017 22.04% 19.42%
2018 1.62% -6.24%
2019 73.56% 28.88%
2020 102.26% 16.26%
2021 38.36% 26.89%
2022 -5.15% -19.44%
2023 103.28% 24.23%
2024 28.62% 14.70%
CAGR GSD Sharpe DDD3 BBW Drawdown
39.60% 29.79 1.28 1.99% 18.6 -33.52%
The last two signals for this trading strategy arrived on 3/23/2020 and 10/12/2022.
So I do think there is a point in trying!
No. of Recommendations: 1
Yes, I find my preferred stocks at cdx3. I use contrarian outlook for close end bond funds, but they are pretty easy, and with just a little self education, you could pick your own and do well. There is a a free screener for close end bond funds at
https://www.cefconnect.com/ Beating the s and p is tough, so I will leave that to others.
No. of Recommendations: 1
For preferreds, it used to be that the site CDX3 was the place to go.I bought his earlier book and subscribed (it wasn't ugly then) for a year. After the year, I'd learned everything he had to teach--he was starting to repeat himself--so the recommended preferreds he included were no longer worth the cost of the subscription, so I unsubscribed. I still get his weekly email containing his current recommendations; some of those remain useful to me when I'm looking to replace a called preferred. I looked through his summary of his latest book, and that edition just seemed to have added bells and whistles, but nothing of added substance. That made the latest edition not worth the cost to me.
I also use
QuantumOnline (
https://www.quantumonline.com/ ) for its extensive database of preferreds. Sourceforge used to have a program (Preferred Stock Search Application) that sorted through that database, but the writer got tired of keeping it up with Yahoo!'s games (because he included current prices in the sort) and hasn't supported it for some years. I'm not programmer enough to excise the current price parts of the code, so I grunt through a manual search--copy/paste the database into notepad/Excel--and go through the process, most of which is formatting the download so a decent search can be done.
Eric Hines
No. of Recommendations: 5
OK zee, but mungo showed us how to do his system.
Any chance you can do the same?
No. of Recommendations: 3
One of the things I really enjoy about this group of people is their willingness to share and be a source of constant ideas. And while I know there will be some disagreement and occasionally a few people will allow emotion to drive some of what they say, for the most part - people are just well-mannered here!
Further thoughts around preferred stock, as well as what Zee has posted, etc. are very encouraging, and I hope to contribute in some small way in the not-too-distant future.
There's plenty of food for thought here, and I appreciate everyone that has jumped in and commented!
Hope everyone has a great day!
Lee
No. of Recommendations: 11
No. of Recommendations: 2
Amplifying "The problem is that when these signals come every single cell within you is screaming to do the opposite. These signals will never come when you think it makes sense to act on them. This is the quandary of every investor."
The best investments from the bottom always seemed absolutely crazy at the time. Investing at the right edge of the chart is hard.
FC
No. of Recommendations: 10
Here is a backtest using Jim's bottom detector signals. From the signal out one full year the system holds QLD (NDX100 x 2). The rest of the time it holds SPY - the S&P 500. No signals are used to go to cash.
It loses to the S&P 500 LTBH in two years - 2021 and 2022. In both cases the difference is minor. It wins in all other years.
Mungo Index
Years ROI ROI
2009 173.08% 52.84%
2010 12.78% 12.78%
2011 2.58% 0.00%
2012 49.65% 13.41%
2013 32.31% 29.60%
2014 19.87% 11.39%
2015 16.94% -0.73%
2016 14.23% 9.54%
2017 21.70% 19.42%
2018 2.81% -6.24%
2019 80.88% 28.88%
2020 134.43% 16.26%
2021 25.11% 26.89%
2022 -28.59% -19.44%
2023 89.09% 24.23%
2024 18.38% 17.32%
These are the actual trades. None of them see holding the index LTBH beating out the system by a significant amount!
Sig Held Entry Date Exit Date % G/L SP500
SPY 3/2/2009 3/4/2009 1.60% 1.72%
E QLD 3/4/2009 3/4/2010 166.29% 57.53%
SPY 3/4/2010 10/4/2011 3.16% 0.09%
E QLD 10/4/2011 10/3/2012 71.35% 29.10%
SPY 10/3/2012 9/25/2014 40.98% 35.49%
E QLD 9/25/2014 9/25/2015 8.58% -1.76%
SPY 9/25/2015 9/30/2015 -0.63% -0.59%
E QLD 9/30/2015 1/20/2016 -2.74% -3.16%
E QLD 1/20/2016 9/29/2016 35.16% 15.69%
SPY 9/29/2016 1/19/2017 5.85% 5.23%
SPY 1/19/2017 12/24/2018 7.77% 3.86%
E QLD 12/24/2018 12/24/2019 107.40% 37.10%
SPY 12/24/2019 3/16/2020 -25.33% -25.97%
E QLD 3/16/2020 3/16/2021 223.71% 66.07%
SPY 3/16/2021 9/29/2022 -6.06% -8.13%
E QLD 9/29/2022 9/29/2023 56.54% 17.79%
SPY 9/29/2023 9/12/2024 32.15% 30.50%
Now it is certainly true that I've not found every single case where Jim has posted a signal. I may have missed some. This little test is simply to illustrate that it can be done and it is not all that difficult.
No. of Recommendations: 0
I don't know Ray, I mean... PGX has a yield of @6% and a total 12 month return of 26%... lumpy big returns in Nov 23-Mar 24 ...
...this of course according to div-adjusted Yahoo Finance...
FC
No. of Recommendations: 2
Zee, I know your system is proprietary, and that if you made it known, it could be arbitraged away. That being said, it would be helpful if you could point us in the right direction. Maybe give us books to read that could help us develop our own systems.
No. of Recommendations: 1
For preferreds, it used to be that the site CDX3 was the place to go. Then he skyrocketed the subscription fee and then closed down.
The CDX3 newsletter still regularly shows up in my inbox with picks, ratings and news events. No charge.
DB2
No. of Recommendations: 14
Maybe give us books to read that could help us develop our own systems.I have no idea if any of the ideas found in this book are part of Zee's system(s), but conceptually this book seems solid:
https://www.amazon.com/Research-Driven-Investor-In...This was written by Timothy Hayes of Ned Davis Research (ndr.com).
There's good news and bad news with this book:
1. A lot of concepts are well presented and explained, and it includes numerous studies showing how various strategies could improve overall performance. I liked the layout because it built on macroeconomics, and then worked it's way "down" into more specific things regarding what to invest in and when. Full disclosure: it's been *well* over 10 years since I've read this book, having gotten busy with work and other things in life (now that I'm retired, I've got some time!)...
2. The book is dated, having come out around 2000. On one hand, we all want to see how these various studies have done over the last 24 years... That, by definition, won't be found in this book. But on the other hand, to the extent that data can be found (?), it should be possible to update the studies found in this book and see how well various things have worked out of sample. Having fallen into the trap of curve fitting on historical data more times than I care to admit, this is pretty valuable to me.
I'm traveling right now, and will be for a while, but my plan when we get back home is to start the process of finding data and testing a number of the studies defined in this book. I'm happy to share what I learn on this board, particularly if there's interest. Many things have already been explored here, and many things may be a dead end. If I were a betting man, I suspect it will reenforce how difficult it is to find things that can stand the test of time, but I may be proven wrong!
On the other hand, perhaps there are a few solid concepts that can help. And... maybe (just maybe) it will keep me from over-trading if I'm busy with some projects!
Lee
No. of Recommendations: 1
I agree with Ray. Better to buy individual preferreds and then check them once a month to make sure they are still ok. I never had one go bad on me, that I did not catch in time.
No. of Recommendations: 2
The best strategy I found is buying Deep In the Money Leaps with maybe 5 - 10% time value and a delta close to 1. You can make or lose 2.5x your investment. Since the market goes up more than it goes down, you should do very well.
Ray and Jim have had success with it.
this is the best book on it.
https://www.amazon.com/INTRINSIC-Using-LEAPS-Retir...
No. of Recommendations: 0
I took a look at it. It looks like a great book.
No. of Recommendations: 2
Another approach would be to use stockcharts' definition of their Technical Rank (SCTR) with their standard industry/sector breakdowns to do GTR1 backtests using those momentum criteria against GTR1's sector / industry symbols...
SCTR is basically 3,6 and 12 month price momentum in a relative percentile ranking similar to IBD's. (99 is extremely good and rare).
Just suggesting using the good data Mr. Geary has long made available when feasible.
