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August 04, 2008

Aggressive Portfolio -3.27% YTD
by Bill Rempel

In its initial version, Aggressive was an equal-weighted portfolio derived from two different quantitative stock screens, based on companies that trade on U.S. exchanges. Each screen produced an exceptional trading plan by itself, but when the two were combined, the volatility of returns was reduced without much degradation of total returns. This was because their backtested, detrended equity curves have relatively low correlation. Through experimentation and backtest, I have found a simplified "one screen" method that produces slightly improved results, and in my opinion, simpler is usually better.

Information is as of the close on August 1, 2008.

Model Allocation

Based on beginning with a $100,000 portfolio at inception, the target allocation is a 10% weight in the top ten qualifiers. See my previous post on this system. The sort here is by ticker, and the portfolio weights are shown rounded to the nearest tenth of a percent.

Adams Resources & En (AE) 8.5% weight
BJ'S Wholesale Club (BJ) 10.3% weight
Crawford & Co. Cl 'B (CRD/B) 11.6% weight
Corporate Express Nv (CXP) 9.8% weight
Finish Line, Inc. (FINL) 11.2% weight
Industrial Distribut (IDGR) 8.9% weight
Kroger Co. (KR) 8.4% weight
SAIC Inc (SAI) 7.9% weight
Stepan Co. (SCL) 15.2% weight
Synnex Corp (SNX) 8.5% weight

Cash -0.4% weight

Returns

Based on beginning with a $100,000 portfolio at inception.

Equity: $96,730.48
Gain, Past 4 Weeks 3.64%
Gain, Year to Date -4.04%
Gain, Since Inception at 11/26/2008 -3.27%

No stocks in the Aggressive portfolio went ex-dividend in the past four weeks.

Changes To Model Allocation and System Weights

Through experimentation and backtest, I have found a simplified "one screen" method that produces slightly improved results over the original blend of two screens. The new screen combines two momentum filters with a valuation sort order, holding the cheapest stocks that meet the momentum requirements. I have tested various holding counts and settled on the top ten for my model portfolio tracking. Counts of five through twenty were tested with robust results, the main response being a reduction in volatility as more stocks were held, but returns diminished slightly and transaction expense increased as well. The new model allocation is a 10% holding of each of the following stocks, sorted by Price/Sales ratio (ascending).

International Assets (IAAC)
Nash-Finch Company (NAFC)
Industrial Distribut (IDGR)
Kroger Co. (KR)
Unifi, Inc. (UFI)
Fred's, Inc. (FRED)
USA Truck, Inc. (USAK)
Companhia Brasileira (CBD)
A. Schulman, Inc. (SHLM)
Ikon Office Solution (IKN)

If this system were to be initiated today, the target allocation would be a buy for 10% weight holdings of each stock listed.

Tracking

Tracking is problematic this update, as one of the stocks held has stopped trading. Corporate Express Nv (CXP) is in the middle of an acquisition process, and as it is an ADR, the NYSE has decided to cease trading in the issue.

Until the acquisition closes, this position is "dead money." The position is marked at the last trade price ($14.38) until such time as the situation changes. While the stock should be sold to meet the model allocation, it can't be sold, so the position which should be added - but has the highest Price/Sales ratio - will be declined.

AE, BJ, CRD/B, FINL, SAI, SCL, and SNX will be sold Monday morning, market at open. These sales, combined with accounting for the small negative cash position, account for 72.8% of the portfolio weight. The target allocations based for the new holdings will be 10.4% weights calculated on Friday's closing prices, and shares of CBD, FRED, IAAC, NAFC, SHLM, UFI, and USAK will be bought Monday morning, market at open. IKN, at the bottom of the list to add, will be declined because CXP must be kept.

Personal Trades

Rather than list my personal trades in a separate post, as I have done in the past, I'm going to mention them in the context of the system which is being traded. I am following the tracking portfolio for Aggressive in my personal account, with weights that might vary only slightly from the tracking weights.

Commentary

For those interested in a less diversified, more aggressive approach, holding only the top five from the previous list would provide that. I personally think there's little to be gained in return, and a lot to be "gained" in terms of volatility, from that technique.

Here are the "next five" on the list, for those interested in holding a larger, more diversified set of risks:

Stepan Co. (SCL)
ABM Industries, Inc. (ABM)
Ciber, Inc. (CBR)
New Jersey Resources (NJR)
Pharmerica Corp (PMC)

The most passive approach that could be taken with this screen is to view the list merely as interesting candidates for further evaluation. I prefer using other initial screens when taking this approach, however.

There is also an "active trader" approach that could be initiated with these lists. By keeping these stocks on a watch list and monitoring them for breakouts or "runaway" conditions, they could present day- or swing-trade opportunities for the trader who is capable of monitoring the markets intraday. For example, I might consider a day with range of double a recent average (20 day, perhaps) and a close high in the range, or a gap up, a "runaway" condition if volume were higher than a recent daily average and a new high were made. If I were trading this approach, I would set a tight initial stop based on a one- or two-day price low, and use a wide trailing stop to let the market run. If I were in such a trade during a switchover weekend like this one, I would continue holding with trailing and initial stops, letting any winners run.

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, as well as my personal portfolio, and disclose all results (good and bad) at regular intervals. Members receive email notification of new posts and can contribute to the site through comments. Registration is still free!

Bill Rempel
The Rempel Report

Disclaimer: Nothing at The Rempel Report, or any communication from The Rempel Report or its author, should be construed as personal advice, on investing or anything else, and at all times you are responsible for your own actions and you should perform your own due diligence. I'm not an investment professional, and you should probably consult with one, in addition to doing your own due diligence, before making any investment decisions.

I may have a beneficial position in any potential investment I mention. My positions in, and opinions of, those potential investments may change over time. I have no obligation to reveal those positions, and if I should reveal those positions, I am under no obligation to notify you, though this site or through any other means, if I change those positions.

While I do try to verify much of the data presented, I can make mistakes. I rely on third party vendors for data, and sometimes that data could be incorrect. Therefore, I cannot and will not be held liable for incorrect or erroneous data presented in text, table, chart, or other format. This is one more reason why you should consult with an investment professional, in addition to doing your own due diligence, before making any investment decisions.

Modeling is prone to error, and no statistical model is perfect. The output from statistical or predictive modeling should be viewed with skepticism.

Fundamental analysis is based on examinations of company filings such as income and cash flow statements, balance sheets, quarterly and annual filings, proxies, and other such items. Even though a company appears fundamentally sound today, that doesn't imply they actually are, or will remain, fundamentally sound. Fundamentals can change over time, and there is always the possibility that the company filed information that was either fraudulent or incorrect. I might make an oversight or error when examining company filings. In many cases, I will rely on a third party's presentation of filing data, such as a stock screening program's output, without actually reviewing the filings personally.

Technical analysis is based on the study of historical price, volume, and sentiment data over time. Past performance is no guarantee, and there are no certainties hidden in patterns, charts, indicators, or formulae.

FundaTechnical analysis involves those items which mix elements of Fundamental and Technical analysis, including valuation metrics such as the Price/Book or Price/Earnings ratios. Therefore all the warnings for both Fundamental and Technical analysis apply.

Take responsibility for your own actions. You should consult with an investment professional, in addition to doing your own due diligence, before making any investment decisions.

Copyright © 2005-2008 Bill Rempel

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