Returns for week ending 6/17/11

Returns for the past week:
Model portfolio: -0.5%
Actual managed account: -0.4%

Value of $10,000 invested in model portfolio at inception in 2003: $271,359

Returns for week ending 6/10/11

Returns for the past week:
Model portfolio: -1.7%
Actual managed account: -1.0%

Value of $10,000 invested in model portfolio at inception in 2003: $272,596


The DecisionPoint.com Thrust / Trend Model is now on a NEUTRAL signal as of today. The TTM drives the model portfolio's target allocations. Upon receiving a NEUTRAL signal, the model portfolio halves its position size from $10,000 to $5,000, raising 50% cash while we wait for a fresh TTM BUY signal.

Since the model portfolio currently holds only 4 stocks (above) the model portfolio allocation is now at 80% cash / 20% stocks. As mentioned before, I continue to hold an even greater percentage of cash in my managed accounts while awaiting a fresh BUY signal. This has helped to preserve capital while we seek a better return vs. risk opportunity to put our capital to work.

Returns for week ending 6/3/11

Returns for the past week:
"New" model portfolio: -1.6%
Actual managed account: -0.5%

Value of $10,000 invested in model portfolio at inception in 2003: $277,344

I continue to hold significantly more cash in my actual managed accounts than in the model portfolio shown here as we await a fresh T/TM BUY signal. This accounts for the difference in performance between the model portfolio and the actual managed account.

Returns for week ending 5/27/11

Returns for the past week:
"New" model portfolio: -1.3%
Actual managed account: -0.6%

Value of $10,000 invested in model portfolio at inception in 2003: $281,711

Note: In my managed accounts I continue to hold more cash than the model portfolio. I expect to continue with a higher cash balance for the duration of this intermediate cycle. e.g. until the Thrust / Trend Model throws a "fresh" BUY cycle.

Returns for week ending 5/20/11

Returns for the past week:
"New" model portfolio: -1.5%
Actual managed account: -0.5%

Value of $10,000 invested in model portfolio at inception in 2003: $285,277

Click below for next week's holdings.

Returns for week ending 5/13/11

Returns for the past week:
Model portfolio: -3.2%
Managed account (actual): -1.9%

Value of $10,000 invested in model portfolio at inception in 2003: $289,727

Note: In my managed accounts I continue to hold more cash than the model portfolio. I expect to continue with a higher cash balance for the duration of this intermediate cycle. e.g. until the Thrust / Trend Model throws a "fresh" BUY cycle.

Returns for week ending 5/6/11

Returns for the past week:
"New" model portfolio: -6.03%
Actual managed account: -3.65%

Value of $10,000 invested in model portfolio at inception in 2003: $299,129

Note: "Actual" return varies from the model's return because I'm maintaining a higher cash position (approximately 50%) until the Thrust / Trend Model (TTM) gives us a fresh "BUY" signal.

As I mentioned last week, I'm doing this because of risk vs. reward. While the "new and improved" model has better returns than before, it also has higher weekly volatility, as we've seen just this past week. Because of this, it's now much more important to time the investment of fresh funds during times where we have a fresh BUY signal from the TTM.

As I noted last week, the market trend has become quite extended above its trend line since the current BUY signal was triggered in September, 2010. The risk of a "normal" market sell-off giving us a significant interim loss in our portfolio is much greater now than if the TTM had just thrown us a fresh BUY signal. In my judgement, this is not a good point in the intermediate term cycle to increase our risk exposure.

Changes to the Strategic Growth Model, continued

This chart shows the Strategic Growth Model portfolio returns for each of the Thrust / Trend Model (TTM) signal periods since the model's inception in 2003, including the four interim losses that exceed -4%. It's an interesting visualization of the data shown in the earlier table.

This picture clearly shows the benefits of putting 100% of funds to work in the best stocks at the right time, and avoiding stocks all together when it's NOT the right time.

It also clearly shows that the model portfolio's biggest interim losses tend to come when market's up trend has been extended for several weeks beyond a fresh BUY signal.

Changes to the Strategic Growth Model, continued

Managing risk vs. reward...

There are two primary success factors required for the model to profitably align the portfolio's capital in accordance with prevailing market conditions... The model must 1) CONSISTENTLY determine the prevailing market conditions (BUY-NEUTRAL-SELL) and 2) allocate the portfolio's capital (long-short-cash) to take best advantage of the potential rewards while managing the risks associated with the various market conditions.

The Strategic Growth Model relies on the Thrust / Trend Model (TTM) by DecisionPoint.com to signal the various market conditions. The TTM is purely mathematical, which is ideal for our purposes because this removes the possibility that the model's allocations will be affected by human emotions, which tend to be wrong at the most inopportune times.

The table shows the model returns for the 31 TTM signal periods (BUY-NEUTRAL-SELL) since inception in 2003. It also shows the maximum interim loss for each signal period. You'll note that in sixteen "BUY" periods, the maximum interim loss exceeded -4.0% only four times and the maximum interim loss for ANY BUY period was -8.8%. This shows that if the model were to invest 100% of its funds in the selected stocks upon receiving a fresh BUY signal, it's infrequent that the portfolio would weather an intermim loss of even -4% before going on to make a new high water mark, and it would be extremely rare that it will ever see an interim loss worse than -9%. This is well within the system's design limits.

Also note that the benchmark S&P 500 index was down during four of the five "SELL" periods, while the model portfolio was able to show gains during three of these periods.

In summary, the Thrust / Trend Model has demonstrated a CONSISTENT ability to keep the model portfolio on the right side of the market at the most critical turning points.

So... if the SGM is using the same stock selection model and the same Thrust / Trend Model as before, what's changed?

What's changed is the model's allocation strategy.

The specific instrument formerly used to hedge our portfolio (TWM) has been shown to put a drag on the portfolio's performance that far exceeds its value as a hedge against risk. There are multiple factors involved including the specific index being used for the hedge (TWM is linked to the Russell 2000 index of small cap stocks) and the "tracking error" associated with a 2x leveraged fund.

During periods of low risk (BUY) the model portfolio will now allocate 100% of its funds to stock positions. During periods of moderate risk (NEUTRAL) the model portfolio will reduce its exposure to stocks and hold 50% of its funds in cash. During period of heightened risk (SELL) it will allocate 50% of funds to a short position in a non-leveraged INVERSE fund and hold the balance in cash. While this allocation strategy introduces a higher amount of weekly volatility, we've already seen that the model's expected maximum interim loss remains well within acceptable limits.

The model portfolio's allocations are now as follows, in accordance with the Thrust/Trend Model's signals:
BUY - 100% long
NEUTRAL - 50% long / 50% cash
SELL - 50% short / 50% cash

Please note that in my managed accounts, I'm currently maintaining a higher cash position than the model portfolio (approximately 50%), and will continue to do so until the Thrust / Trend Model gives us a fresh "BUY" signal.

I'm doing this because of risk vs. reward. The market trend has become quite extended above its trend line since the current BUY signal was triggered in September, 2010. The risk of a "normal" market sell-off giving us a significant interim loss in our portfolio is much greater now than if the TTM had just thrown us a fresh BUY signal. In my judgement, this is not a good point in the cycle to increase our risk exposure.

Changes to the Strategic Growth Model

As you will recall, the Strategic Growth Model (SGM) is designed to maximize returns over the full market cycle (Bull-Bear-Bull or Peak-to-Peak), and is comprised of two main elements... 1) Select stocks that are expected to outperform the market, and 2) Manage risk vs. reward by aligning capital (long vs. short) with prevailing market conditions. Rather than attempt to "predict" where the market may go in the future, the SGM uses a mechanical Thrust/Trend Model (TTM) by DecisionPoint.com to determine prevailing market conditions. It then allocates capital according to the risk vs. reward profile associated with where the market is within the context of its full cycle.

re: #1) Stock Selection... Except for a 12 month period immediately following the historic market decline of 2007-09, the stock selection algorithm has performed exceedingly well since the model's inception in 2003. So the model portfolio will continue to use the same stock selection algorithm as before. The chart's "SGM long portfolio" shows that the stocks selected by the Strategic Growth Model have outperformed the benchmark S&P 500 index by nearly 3:1 for the 12 months ending 4/22.

re: #2) Managing risk vs. reward... We've seen that the stocks greatly outperformed the benchmark index over the past 12 months, yet we know that the hedged portfolio has failed to capture a significant portion of those gains. This isn't acceptable. There needs to be a better way to manage risk without allowing the hedge to put such a drag on the portfolio's peformance. This is where the improvements are focused.

More on this soon...