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September 28, 2008

Unfriendly September for Aggressive
by Bill Rempel

Aggressive is a very low-beta, but very high-volatility, trading program for U.S.-market equities. Non-correlation and total return are valued by this system far more than reduction in volatility is, and the system was optimized with a specific, aggressive retail trader in mind (myself!).

Information is as of the close on September 26, 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.

Bway Hldg Co (BWY) 10.4% weight
Casey's Gen Stores In (CASY) 11.2% weight
Computer Task Group (CTGX) 10.2% weight
Corporate Express N V (CXP) 9.9% weight
Freds Inc Cl A (FRED) 12.9% weight
Nash Finch Co (NAFC) 12.8% weight
Nacco Inds Inc Cl A (NC) 9.1% weight
Polyone Corp (POL) 8.9% weight
Saia Inc (SAIA) 7.7% weight
Sanmina Sci Corp (SANM) 7.6% weight

Cash -0.8% weight

This holding portfolio differs very slightly from what a portfolio initiated last month would comprise; this is because trading ceased in one of the holdings, Corporate Express Nv (CXP), because of an acquisition. If the portfolio had been able to exit CXP, then Jo-Ann Stores, Inc. (JAS) would have been purchased in its place. This was discussed in my previous post on this system.

My intent has always been to track the model portfolios in the same manner in which any retail trader could execute the systems behind them, and such a trader could not have exited CXP to buy JAS, therefore the model portfolio didn't, either. This is sorely testing my easy-going nature, as I am personally following the Aggressive system and am really tired of looking at this dead money position on my statement.

Returns

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

Equity: $89,330.01
Gain, Past 4 Weeks -9.16%
Gain, Year to Date -11.39%
Gain, Since Inception at 11/26/2007 -10.67%

One stock in the Aggressive portfolio went ex-dividend in the past four weeks, FRED, generating $15.30 in dividend income for the portfolio. This is included in the above return calculations.

The portfolio took a large hit on September 17, moving down by 9% in one day, with that one day accounting for the entirety of the move over the last four weeks. In terms of four-week moves, this would rank as only the sixth-worst four-week period in backtest, with the worst being -12.85%.

In terms of my personal returns, this is the second-worst month (if it stands until the end of the month) that I've had - I entered May of 2006 very very overweight in gold, steel, and copper stocks, and lost 9.4% that month. It really does all come down to knowing your tolerance for volatility of return, and trading accordingly.

Changes To Model Allocation and System Weights

The 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).

Nash-Finch Company (NAFC)
Hitachi, Ltd. (HIT)
Spartan Stores, Inc. (SPTN)
Universal Forest Pro (UFPI)
Caseys General Store (CASY)
Shoe Carnival, Inc. (SCVL)
Integrys Energy Grou (TEG)
Fred's, Inc. (FRED)
Atmos Energy Corp. (ATO)
Saic Inc (SAI)

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 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.

BWY, CTGX, NC, POL, SAIA, and SANM will be sold Monday morning, market at open. These sales, combined with accounting for the negative cash position, account for 53.1% of the portfolio weight. The target allocations based for the new holdings will be 8.9% weights calculated on Friday's closing prices, and shares of HIT, SPTN, UFPI, SCVL, TEG, and ATO will be bought, market at open. SAI (not to be confused with SAIA) is the tenth position on the list and the "odd man out" as I need to keep the dead money position that can't be sold (CXP).

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:

Unifi, Inc. (UFI)
Ikon Office Solution (IKN)
Ferro Corp. (FOE)
New Jersey Resources (NJR)
Invacare Corp (IVC)

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 five 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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