Crush The Market - Trading strategies

Backtest your stock screen ideas for free!

2009-01-13T15:56:00.003-05:00

Backtesting a stock selection idea is a complicated process. Here are some free websites that let you test your ideas:

www.backtest.org

www.keelix.com

5 ways to succeed in a volatile market

2008-11-11T15:02:00.004-05:00

Whew! The S&P 500 is down roughly 42% from it's high last October. Buffet is buying. Sentiment indices are hitting lows. It's a tough time to be long stocks. Here's 5 ways to ease the pain and succeed in a volatile market such as this one:

1. Hedging
Here are 5 ways to hedge your long positions:

Pairing
Short against the box
Exchange-traded funds (ETFs)
Futures
Options

Click here to learn more about these strategies.

2. Market timing
There are many successful market-timing models out there. People that say market-timing doesn't work don't understand the purpose. The purpose of market-timing is to reduce risk! Most of the time a market timing model will not keep up with fully-invested long positions. However, when the market gets ugly, market timing shines. Take a look at the performance of HSGFX and you'll see what I mean.

The Halloween indicator is one such market-timing model that would have worked well this year. Learn more about this model here.

3. Asset allocation
Increase cash when the market gets volatile! Reduce position size! Don't be as aggressive with long positions. Perhaps you use VIX as an indicator of how much cash to hold in your trading account.

4. Market-neutral or uncorrelated strategies
Here's some examples:
- uncorrelated markets (Corn anyone?)
- option selling
- covered call writing
- Bond trading, etc...

5. Stick with your trading plan!
Remember that all traders and investors are feeling significant pain at this point. Contrarians and value investors are starting to buy. Just when the pain is unbearable, the market is ripe for a turnaround. A good trader sticks with his plan even through the drawdowns.

What are the market effects of presidential elections?

2008-11-05T17:04:00.002-05:00

CXO Advisory does a great job of summarizing market movements with presidential elections. Here's an executive summary:

In summary, there appear to be both long-term and short-term connections between the U.S. national election cycle and stock market performance, with presidential term year 3 (1) the best (worst) and a tendency for a brief election-time rally. However, the subsamples for presidential term year analysis are very small, so confidence in related tendencies is very low.

Get the whole scoop here:
http://www.cxoadvisory.com/blog/internal/blog1-04-08/

Hedge with VIX?

2008-10-29T09:37:00.002-04:00

The VIX has me a bit nervous because it is higher now than it ever has been.

Wouldn't it be nice to add a VIX ETF to your portfolio? The last time I checked into this, VIX is a tradable futures contract, but it doesn't quite act the same as the index. Perhaps selling options would be a good way to mimic the VIX. I've been thinking about a strategy where I would sell strangles or straddles on the SPY, and rolling them every so often so the market doesn't penetrate one side. I haven't thought this all the way through, though. Any opinions?

A market-neutral options strategy

2008-10-29T09:32:00.003-04:00

With a market like this, everyone would like to add some uncorrelated or market neutral strategies to their portfolio. Here's one that I ran across quite accidentally:

http://www.agoraoutlook.com/

Here's a summary of what they do:

We use a unique program for trading index options which is opposite of the buy and sell method of trading options. What we do is sell options using credit spreads and outright selling techniques and watch the premium evaporate over time. We mainly trade the S&P 100 and 500 cash and futures indexes. Besides our trading program, the publication is designed to inform you of significant economic news, the mood and technical condition of the market and relevant trade data by e-mailing it directly to you. If there is an important news event that moves the market we also let you know about it right after it occurs!

The special emphasis of the Agora Outlook is its unique trading program. Established in 1990, by Ken Davidson, the program concentrates on trading U.S. indexes. Mr. Davidson has tested his program with key option indexes since 1982 and to date has produced an impressive 94% reliability. Since he began actual trading in 1990, the program has produced an average 134% profit per year, excluding commissions. The program has never had a down year!

Simply put, our trades involve selling options in a way which gets time working for you instead of against you. Most people who buy options do so to make a profit on a rising or falling market. Unfortunately, over 88% of all index options expire worthless! The problem is, the index may go the wrong way or it may not go anywhere so the investor’s premium in the option slowly decays. As each day and hour goes by, the option moves closer to expiration reducing the time premium! A trade can be profitably made if the market is moving up, down or even sideways! This gives investors the opportunity to make money 66% of the time instead of only 33%, which is the case when you outright buy for either a rising or falling market. This means that our program has a much higher success rate than the traditional buy and sell method! We apply a mathematical model to the market to find trades that make time work for you instead of against you. This is what makes our program unique! We always try, if the opportunity presents itself to trade the market on both the upside and the downside as our program supplies the upside and downside closing boundaries of a particular expiration cycle. This also means that you are guaranteed a win on at least one trade.

It looks interesting, but the costs are a bit high at $100 per month. But it least it gives us ideas on how to survive in a volatile market such as this one.

Trader's mashup gadget

2008-10-15T15:53:00.003-04:00

Zack's Earnings and Margins screen

2008-06-13T13:54:00.002-04:00

Zack's Investment Research has an area of their website devoted to stock screens. One of the screens that they are currently featuring is the Earnings and Margins screen. The screen looks for stocks with growing earnings, earnings above zero, a good Zacks rank, and a good broker rating.

Here's the parameters of the screen:
- The most recent completed year's earnings higher than the previous year's earnings.
- Net Margin above zero.
- Zacks Rank <= 2
- Average Broker Rating = 1.0

And here's the results (rebalanced every 4 weeks):
2008 (through 3/21/08): -13%
2007: 7.7%
2006: 22.4%
2005: 27%
2004: 11.1%
2003: 103%
2002: 29.1%
2001: 58.5%

It's interesting to note that this screen has always had a positive year until this year. This year is proving to be especially tough for investors and traders. Good luck out there!

Calendar market timing model (Halloween indicator)

2008-03-26T09:17:00.000-04:00

Here is a well-known strategy for timing the stock market: Sell in May and buy in November. (AKA "Sell in May and go away" & the Halloween indicator)

In their paper entitled "The Halloween Indicator, 'Sell in May and Go Away': Another Puzzle", Ben Jacobsen and Sven Bouman document this pattern in 36 of 37 global markets studied. This is a very robust timing method that works well in most markets, although researchers are puzzled as to the reason.

Conservative investors could develop a strategy that would simply reduce and increase exposure to stocks via asset allocation in lieu of being 100% or 0% invested.

Novice traders might ask, "Well what happened this year?". The answer is that no strategy works all the time. Good strategies have been proven to work most of the time.

See also: Quant Investor: Calendar Based Market Timing Model

Collective2 trading systems

2008-03-26T08:56:00.000-04:00

Collective2 is an interesting website that offers subscription trading systems. These systems are often technical in nature. Caveat emptor - anyone can submit a system, so there are a lot of subpar systems on there. Since you don't know the rules of the system, they are black box trading systems. Many systems I have noticed are probably data mined, because you can look at the chart and watch it fail when it operates in real time.

That said, the website lets you find systems several different ways. Once you go to the website, take a look at the options under "Find a system". There are quite a few good systems out there. Even if you don't want to subscribe to one, you can read the descriptions to get ideas for your own trading strategy.

Relative strength stock screen

2008-02-27T09:42:00.001-05:00

Here's a stock screen from the Motley Fool Mechanical Investing boards which uses relative strength as it's sole criteria. This is a market crushing strategy for people with little time to trade, since it is rebalanced every 3 months. 30% annual return is not too shabby...

Actual screen code:
Define {RS13WKT12}
Uses [Timeliness Rank] [Total Return 13-Week]
Deblank [Timeliness Rank] [Total Return 13-Week]
Keep :[Timeliness Rank]<=2 Sort Descending [Total Return 13-Week] ; Top :10 End   Results from backtest.org from holding the top 10 stocks for 3 months at a time:

CAGR	30	12
GSD	38	16
Sharpe Ratio	0.83	0.54

Screen	S&P

1986	22	24
1987	17	6
1988	17	10
1989	37	35
1990	-2	-5
1991	107	31
1992	11	7
1993	31	10
1994	13	2
1995	48	39
1996	56	23
1997	-5	28
1998	37	35
1999	209	18
2000	21	-11
2001	-33	-9
2002	-1	-22
2003	114	28
2004	57	10
2005	12	8
2006	33	14
2007	11	6

Trend Weaver diversified futures trading strategy

2008-02-20T12:23:00.000-05:00

Trend Weaver is a diversified trend-following futures trading strategy created by Shay Campbell.

The strategy uses diversified markets such as: British Pound, Coffee, Crude oil, Cotton, Dollar Index, Eurodollar, T-Note 5 yr, Gold, Heating Oil, Japanese Yen, Lumber, Lean Hogs, Natural Gas, Nikkei Index, Palladium, Rough Rice, Soybeans, Swiss Franc, T-Note 10-yr and 30-yr T-Bond.

On Shay's website, he shows 3 different portfolios, which shows the effect of of using a different group of futures according to your account size. The large strategies use a wider variety of futures than the small strategy. However, any combination of futures can be used.

Shay has applied position sizing to simulate these real-world results, which are backtested from Jan 1987 to Dec 2006:

Small account (starting with $10,000)
Position size: 7% per trade
Compounded annual growth rate: 31.4%
Max drawdown: 32.6%

Medium account (starting with $20,000)
Position size: 6% per trade
Compounded annual growth rate: 57.4%
Max drawdown: 33.7%

Large account (starting with $50,000)
Position size: 4% per trade
Compounded annual growth rate: 75.6%
Max drawdown: 42.4%

Equity curve of large portfolio using 1 contract:
The system has a win rate of about 40%, with winning trades being over twice as large as losing trades.

The nice thing about this market crushing strategy is the variety of contracts traded. It's probably not correlated to the stock market, so it would make a nice supplement to a stock trading account. Also, this is a working system that has been in use for several years. Also, Shay tells me that this system is tracked by Futures Truth Magazine starting this year. As of Jan 08, it was ranked #1 out of 271 systems for trading crude oil. If you decide to purchase this system, please tell them Crush the Market sent ya!

Portfolio 123 - GARP (Growth at a reasonable price)

2008-02-12T11:44:00.000-05:00

Portfolio123 is a platform for developing and executing quantitative stock strategies.

From their website: "Portfolio123's breakthrough platform allows you to create, backtest and put into production your quantitative strategies."

One of the characteristics that helps Portfolio123 rise above other screening programs is the ability to rank stocks. Ranking is a better way to pick stocks than screening.

Today, we are going to feature a model portfolio strategy called "GARP $100K " Here's the description from their website:

This strategy finds GARP (Growth At a Reasonable Price) stocks with SmallCap concentration. It holds aproximately 20 stocks, has a relatively low yearly turnover of around 150%, and is liquid for investment amounts of $100K and more.

The top ranked stocks are picked based on a ranking system that combines several factors, such as: technical, valuation, earnings quality, and industry leadership. The highest ranking stocks must also pass these conditions:

- Have low PEG (Price to Earnings Growth)
- Pass liquidity tests
- Market cap between $50M and $1B
- Sector does not exceed 20% of total
- Have low correlation with other holdings

Rebalancing is done weekly: if a stock's rank drops below a certain threshold or if the market cap exceeds $2B it is replaced by a higher ranked stock.

This model returns an average of 32% per year with a max drawdown of 28%, which crushes the market quite easily. Details of the results of the model are shown here.

Jamie Gritton's MI Stock Screen Backtester

2008-02-05T07:39:00.000-05:00

To show that there are numerous ways to Crush the Market using a free trading strategy, we present the following stock screen, backtested on Jamie Gritton's MI Backtester:

SOS_A screen, originally from from the Motley Fool Mechanical Investing discussion board. This is a 'screen of screens' which runs several stock screens and picks the highest ranking stocks. Seems to work pretty well:

Year SOS_A return

1986	`31`
1987	`31`
1988	`32`
1989	`36`
1990	`8`
1991	`84`
1992	`34`
1993	`52`
1994	`27`
1995	`110`
1996	`63`
1997	`34`
1998	`62`
1999	`212`
2000	`-40`
2001	`-36`
2002	`-14`
2003	`61`
2004	`2`
2005	`30`
2006	`9`
2007	`35`

You can learn more about the stock screens derived from the Motley Fool boards (and alot about stock screening strategies) here.

Agora Outlook option selling strategy

2008-01-30T08:01:00.000-05:00

Agora Outlook is a company started by Ken Davidson. They feature a strategy of option selling, using outright selling and credit spreads on the cash indices. It is subscription-based.

The returns shown on their website are market crushing. Since 1990, the lowest return has been 48% in the 'regular trades' system, which occurred in 1998. Every other year has been higher than that, with several years returning over 100%, and the average return is 134%!!! The best part is that the system has been working since 1990. These are not hypothetical backtested returns!

Unfortunately, the site does not give details on drawdowns or the leverage used. Usually, option selling strategies have a high win % and high leverage, which means that every once in a while they get whacked pretty good.

Agora probably uses a sophisticated timing model to enter into trades. The cost is not too bad, $100 per month or $1000 per year (for retail investors). They donate most of the subscription proceeds to charity, which means that Agora probably makes more money trading than they do selling the subscription.

This strategy would not be for risk-averse or inexperienced traders, due to the leverage involved.

James O'Shaughnessy - Cornerstone Growth Screen

2008-01-24T08:15:00.000-05:00

Since our last post on James O'Shaughnessy's Tiny Titans was so popular, we figured it's time to feature another one - The Cornerstone Growth Screen. We have used performance history from AAII, American Association of Individual Investors.

James O'Shaughnessy's Cornerstone Growth is a mechanical stock screen that uses several factors to find winning stocks:

Price/Sales ratio less than 1.5
1 year EPS growth > 0
3 months relative strength > 50
6 months relative strength > 50
Ranking: 12 months relative strength

Here's the Market Crushing returns from AAII's website (one caveat: it's possible that the AAII screen may differ slightly):

1998: 19.4
1999: 19.5
2000: 11.5
2001: 19.2
2002: 10.1
2003: 90.3
2004: 45.1
2005: 14.4
2006: 17.2
2007: 12.6 - as of 11/30/07

The lazy investor's option: Buy HFCGX, a mutual fund from Hennessy which follows this strategy.

Here's a performance summary from Smartmoney's website. As you can see, it crushes the S&P 500, especially in the bear market years.

Here's Hennessy Funds website, which features HFCGX and others.

Market Timing model: Timing Cube

2008-01-21T08:15:00.000-05:00

Despite the negative connotation, we at Crush the Market wholeheartedly believe in MARKET TIMING. Today, we feature a subscription-based black-box timing model, Timing Cube. If you visit their website, they have all sorts of timing products, but we'd like to show the market-crushing results of timing the Nasdaq 100 long only:

2007: 2.6%
2006: 12.7%
2005: 12.2%
2004: 17.0%
2003: 49.1%
2002: 6.4%
2001: 30.1%
2000: 28.1%
1999: 104.6%
1998: 105.0%
1997: 32.8%
1996: 44.6%
1995: 40.1
1994: 8.8%
1993: 11.5%
1992: 18.1%
1991: 65%
1990: 12.9%
1989: 26.2%

More results are available at their website, along with more strategies.

Speaking of market timing, everyone times the market. I suspect that with the Dow futures down 350 points this morning, a lot of people will be using fear and panic, instead of a strategy, to time the market tomorrow.

Five Hedging techniques to protect against a declining market

2008-01-17T10:11:00.000-05:00

With all the ugliness in the market out there, we thought a post on hedging might be appropriate.

Scott Rothbort wrote a great article at thestreet.com which details 5 hedging techniques:

Pairing
Short against the box
Exchange-traded funds (ETFs)
Futures
Options

We think Scott left off an important one - cash! Unless you're running a billion-dollar hedge fund, you can easily raise cash by reducing your positions.

Chuck LeBeau's 'Remarkable S&P Trading System'

2008-01-15T08:38:00.000-05:00

Chuck LeBeau's Remarkable S&P Trading System is a Tradestation swing trading system that is featured on his website. The website appears to have not been updated in several years, but these older systems could be an absolute gold mine if they forward-test well. Here's a snapshot of the system's equity curve from 1988 to 1998. Looks like a market-crushing strategy to us!

Make 'Mad Money' the easy way from Jim Cramer

2008-01-11T12:30:00.001-05:00

Jim Cramer, host of the popular 'Mad Money' TV show on CNBC, is an entertaining guy who has a great track record and lots of experience on the street. If you missed his blowup earlier this year, you can catch it on Youtube.

Cramer is a smart guy who can pick stocks with the best of them. However, his viewers can be like sheep and buy what he says to the next trading day. This creates an anomaly where 'buys' get short-term overbought and 'sells' get short-term oversold.

In the paper The Performance and Impact of Stock Picks Mentioned on 'Mad Money' , Bryan Lim and Joao Rosario study the behavior of these buys and sells. Take a look at the chart below and ask yourself, how could I make some money one or two days after the show airs? I bet you can come up with a market-crushing strategy. If you need help, check out CXO Advisory's article on this paper.

James O'Shaughnessy's Tiny Titans

2008-01-08T10:40:00.000-05:00

Let's get this started with a good kick with a screen from AAII, American Association of Individual Investors.

James O'Shaughnessy's Tiny Titans is a mechanical stock screen that looks for cheaply priced micro-cap stocks.

Market capitalization between $25 million and $200 million (inflation adjusted). Lowest price-to-sales ratio and lowest price-to-cash flow ratio; and the highest dividend yield. Then choose the top 25 with the greatest twelve month relative strength.

Here's the Market Crushing returns from AAII's website:

1998: 38.1%
1999: 53.8%
2000: -6.6%
2001: 84.1%
2002: 51.9%
2003: 154.8%
2004: 45.8%
2005: 7.5%
2006: 35.2%
2007: 1.5% - as of 11/30/07

Welcome to Crush The Market

2008-01-07T15:16:00.000-05:00

Welcome to Crush The Market - Every week, we feature an existing investing strategy that crushes the market:

- Technical analysis
- Stock screens
- Forex trading systems
- Backtesting
- Why individual stock picks(such as listening to Jim Cramer's Mad Money) don't generate consistent profits.
- Quantitative trading systems
- Hedging techniques
- Market timing techniques

This site is for new investors, experienced investors, traders, financial professionals, and everyone in between. You see, there are thousands of ways to crush the market, out there in the public domain. We find the best ones and bring 'em to you! What could be better than that?