Retrospect
I spent a lot of time today going back through old post to try and figure out where I went wrong recently. I was a bit surprised by some of the things I wrote only a month or two ago. I seemed to be on the market timing bandwagon nearly all the way through January and despite the huge swings in the market I stayed pretty much in cash.
Toward the end of the month, I started sensing a bottom and put some money to work resulting in additional losses. I was down 8.25% at the end of January.
I noticed that toward the end of the month I was getting tired of market timing and getting antsy to get back in. I went back through 2007 to find out if I had timed the market what would have happened. It seemed that market timing my mechanical screens really didn't help my portfolio at all and I came to the conclusion that being fully invested was the best strategy for me.
My returns for February reflect that strategy in conjunction with about four other unproven strategies that I latched on to out of desperation as I watched my portfolio dwindle.
I decided to do some research (research is my thing when I'm losing) and find out if there was a way to secure decent gains while avoiding huge losses. I combined my own weekly data (going back to 2005) with Keelix's backtester (going back to 2003 for weekly data) to test my hypothesis.
If you're interested in the backtested data for the Zweig RS 5 screen you can look at my backtesting job at Keelix's backtesting site. The job # is 207890. I used a simple moving average chart ($NY200R in stockcharts) that I've shown before to judge whether I am in the market or out. Here are the results.
2003--153.51%
2004--35.03%
2005--39.45%
2006--53.90%
2007--37.41%
Those results look really good right now especially when you consider that big market drops were essentially avoided (especially this latest one). There was only one period where the screen lost money and that was in Summer of 2004 where it lost 2.99%.
Food for thought.
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8 comments:
Hey Scott,
Great research. However, if I read that correctly you are timing the market ant following the Zweig RS 26 right? Aren't the results you're getting less than just mechanically following the Zweig Screen without trying to time the market?
Matt,
You're right, mechanically investing does do better than market timing. I'm just wondering if it's a way of avoiding the big swings that are so unpleasant for a bit less return. I think I'd gladly give up a few percent per year if I didn't have such huge drawdowns.
It's quite possible that this latest downturn has affected me enough that I'm looking for ways to avoid the pain and get some of the gain. Maybe when this is all over I'll become less timid.
I think you're discovering that you simply can't accept the volatility present in your screens. You may want to consider, however, how you will feel when the screens start rocking again and you find yourself lagging due to your attempt to limit volatility.
There are two things I know I will never know. Which stocks in my screen will do well and when my screen in general will do well. It's hard to live with those unknowns, but I can because I have confidence that over the long term my screens will outperform.
Do you still believe that your screens will outperform in the long term?
Scott,
You continue to doubt my investment in IESV as a future long term gold mine. Methane, Bio fuels and ethanol will make a swing. You should take a buy in this market for the long term results of being a millionaire in 5 years. Why do you continue to doubt!
IESV Anonymous,
I can take a 20% hit on my portfolio. A 90% drawdown however, would make me throw up uncontrollably. I invite you to contribute to StockPunk when you have a chance. You could title it "How I bought a penny stock and held it for a year and lost 90% of my money but still think it was a good buy."
Screen Anonymous,
I'm still working on getting a balance. I know that my screens rock in the long term, but if I'm trading for a living, short term drawdowns could really impact me. I'm relatively new to this game, so I still struggle with making decisions. I appreciate everybody's opinion because it is making me a better trader!
Scott,
I think you are doing the right thing - looking at ways to mitigate risk and avoid ulcers.
The market is driven by psychology just as often as rational thought. I think it's healthy and human to accept that we are emotional beings who will make short term decisions that aren't always in our best interests.
So I think you are doing the right thing looking at intermediate term timing systems to reduce drawdown. Most timing systems will reduce returns but helps one sleep at night and avoid gut churning draw downs.
I have been looking at the same thing myself but have to admit you have done more research.
Can you clarify the timing system you are using - What period SMA? $NY200R is not recognized by Stockcharts.
In your test did you exit immediately when the SMA crosses under or wait till the following Friday? Likewise do you enter immediately or wait till the monday after a cross over.
One last idea for you - it's a little late in the bull cycle but have you been investing in commodities? I'm actually positive for the year based upon UNG, DBA and DGL (Wait for a dip, invest in an option and sell on strength). More than made up for my equity losses
I hear you Scott,
I messed up trading in ways I didn't really know the past two weeks, but it looked good on paper at first....traded short a number of things through Ultra ETF's. Got burned by the FED's action two days ago and today's S&P announcement turned the market around again...ouch! Now I'm gun shy again. The only thing working for me this week is my move into Gold with a small portion of my portfolio through GLD and SDP. SDP is an Ultra that gives a higher return with more volatility...yeah, that's just great...what am I doing in that??? lol
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