Strategic Growth Model

Sunday, November 22, 2009

Returns for week ending 11/20/09

Model portfolio, hypothetical returns for past…
1 week: -0.7%

Value of $10,000 invested at inception in 2003: $56,316

Monday, November 16, 2009

Returns for week ending 11/13/09

Model portfolio, hypothetical returns for past…
1 week: +0.54%

Value of $10,000 invested at inception in 2003: $56,316

Sunday, November 8, 2009

Returns for week ending 11/6/09

Model portfolio, hypothetical returns for past…
1 week: +2.25%

Value of $10,000 invested at inception in 2003: $56,089

Sunday, November 1, 2009

Returns for week ending 10/30/09

Model portfolio, hypothetical returns for past…
1 week: -3.0%

Value of $10,000 invested at inception in 2003: $54,853

Sunday, October 25, 2009

If you are bearish...

Stock markets are up 60% plus since the March lows. How does this rally stack up with previous ones?

Here are some key criteria of what previous 60% rallies have looked like when analyzed across 10 different key economic dimensions :

Year over Year Retail Sales: 9.3% average in prior 60% rallies versus -5.3% in the current one

Consumer Confidence: 95.5 average; 53.1 now

Capacity Utilization: 79.9% average; 66.6% now

Year over Year Industrial Production: 4.1% average; -10.7% now

ISM: 53.9 average; 52.6 now

Payroll employment gains over period: 2.2% average; -2.0% now

Decline in continued unemployment claims from cycle peak: -26.3 average; -11.6% now

Year over Year growth in total credit market debt: 9.3% average; 3.0% now

Year over Year growth in household debt: 8.8% average; -0.1% now

P/E Multiple: 16.8x average; 20.0x now

Courtesy of ZeroHedge, via Barry Ritholtz - The Big Picture blog

As for me, the most troublesome statistics here are the record high level of excess capacity, and the slow rebound in employment figures. The wheels of the economic bus are still very wobbly.

Returns for week ending 10/23/09

Returns for week ending 10/23/09

Model portfolio, hypothetical returns for past…
1 week: -0.5%

Value of $10,000 invested at inception in 2003: $56,564

Sunday, October 18, 2009

Returns for week ending 10/16/09

Model portfolio, hypothetical returns for past…
1 week: +0.1%

Value of $10,000 invested at inception in 2003: $56,829

RIP Buy-and-Hold - Part II

The Dow Jones Industrial Index passed a psychological milestone this week as the Index broke above the 10,000 level for the first time in a year. The Dow first broke above 10,000 more than ten years ago in 1999 and has since done so on 26 occasions.

Yes, a ten-year buy-and-hold (buy-and-hope) index investor has had NO capital gain over the period!

Sunday, October 11, 2009

Returns for week ending 10/9/09

Model portfolio, hypothetical returns for past…
1 week: +2.1%

Value of $10,000 invested at inception in 2003: $56,811

Saturday, October 10, 2009

Performance summary since inception

This chart shows the performance of the model portfolio compared to our benchmark index since the model's inception.

The system's objective remains constant... to significantly outperform our benchmarks over the complete bull/bear market cycle, with smaller periodic losses than experienced by a passive buy-and-hold strategy. While the model portfolio hasn't been winning the sprint over the past 6 months, it is clearly winning the marathon over the full market cycle.

The model portfolio is also doing an excellent job of managing downside risk. The model's largest periodic loss (from peak to trough) is less than 13%, while the S&P 500 index lost more than 55% at its trough in March. The model portfolio is now within 5% of its all-time peak, while the S&P 500 is still trading more than 33% below its all-time peak made in October 2007.

The model portfolio is up more than 43% over the same period.

About the Strategic Growth Model

The purpose of this “live test” is to demonstrate that a systematic approach to investing can yield exceptional results.

The system uses weekly data for all model inputs. I run the model and update this blog over the weekend. I post all trades prior to the week’s market open. The entire trading system is designed so that the portfolio does not require close supervision during the week.

You can think of the Strategic Growth Model (SGM) as a wave catching system. It first detects capital flows from one industry sector to another. It then uses a variety of fundamental and technical factors to identify the leading stocks in the ascendant sectors. Finally, when market conditions are poor, the system will move into a defensive stance to protect and grow capital.

The system doesn’t attempt to predict capital flows or trend reversals in the market. Rather, it attempts to “listen” to the market and then allocate funds to the sectors and stocks that are already attracting capital. It also allocates capital in accordance with prevailing market conditions. Results show that the system has generated returns in excess of the market over virtually any holding period of 26 weeks or more.

The pillars of the Strategic Growth Model are stock selection, risk management and market timing.

Stock selection.

The Alpha Stock Model (ASM-10) portfolio is the “alpha engine” for the trading system. Its role is to generate excess returns (alpha) without regard to volatility. This highly concentrated long-only portfolio is comprised of equal positions in up to 10 stocks. All stocks share growth characteristics that my research has determined are common to the market’s “big winners” prior to their big run-ups. These stocks are the market’s All-Stars. The predictive model I have developed to select these stocks is the system’s winning edge.

The ASM-10 portfolio is refreshed weekly, as lower ranked stocks are replaced with higher ranked stocks. The portfolio tends to generate exceptionally high returns during favorable market conditions, however, its high volatility makes it too risky for most investors to hold as a complete investment portfolio. To reduce the volatility, a risk management strategy is needed.

Risk management.

The Strategic Growth Model portfolio combines the high performing ASM-10 portfolio with an offsetting short position against an appropriate market index. The aim is to “harvest” the alpha, while stripping out the market related volatility. The result is a portfolio that is non-correlated to the market trend, with reduced volatility and improved risk-adjusted returns.

To construct the hedged SGM portfolio, up to 2/3 of the portfolio’s funds are first used to purchase the ASM-10 holdings. Then to create a simple hedge, up to 1/3 of its funds are used to purchase a leveraged Exchange Traded Fund (ETF) that trades inversely to a major market index. (example: TWM) The SGM portfolio’s default investment stance is fully hedged, or “market neutral.” To further enhance risk-adjusted returns, the Strategic Growth Model integrates a market tested timing system.

Market timing.

While some finance industry professionals will argue that it is impossible to profitably time the market, I have found that many of these same people are merely promoting their agenda. My own tests, including the live test documented here, have shown that a sound market timing system can consistently enhance returns while further reducing risk.

The SGM portfolio is a risk-managed growth folio that intends to accept exposure to stocks over the full bull-bear market cycle, with the objective of delivering enhanced risk-adjusted full cycle returns and smaller periodic losses than a passive buy-and-hold approach. The system adjusts its investment exposure from net-50%-long to net-50%-short, scaled in proportion to the average return / risk profile that stocks have provided under similar market conditions. The portfolio will remove a portion of its hedge during times that present the best probability of market gains, with an added emphasis on defending and growing capital during unfavorable market conditions.

It is important to note that the Strategic Growth Model’s investment stance is not based on a “forecast” of the market trend. Rather, it is based on the average tendency for the market to rise or decline given prevailing conditions. That may seem like semantics – a distinction without a difference – but it is essential to understanding the system’s strategy.

Prevailing market conditions are determined by empirical data, primarily the Thrust / Trend Model (T/TM). The T/TM does NOT rely on my subjective interpretation of data or my predictions of market trend. More information on the T/TM can be found elsewhere on this blog.

On this blog I have posted about concepts that I find useful in developing trading systems and managing risk. Some of my ideas are original, but many of them are synthesized from the books and websites shown in the sidebar. While I will not discuss the details of the predictive model or market timing criteria here, all other comments and questions are welcome.

This blog documents the model's hypothetical peformance. Past performance is no guarantee of future performance. The Strategic Growth Model drives a very aggressive style of portfolio management, and should be considered a high risk strategy. It is not suitable for all investors.

If desired I may be contacted at StrategicGrowthModel (at) gmail (dot) com.

Strategic Growth Model

Sunday, November 22, 2009

Monday, November 16, 2009

Sunday, November 8, 2009

Sunday, November 1, 2009