CEY Exit

As requested by Michael.

Portfolio Update 28/03/2008

No entries to take next week.

Maximum drawdown on closed equity has reached 27.25% which greater than the maximum drawdown seen during testing.

I have made a decision to keep the system open until it reaches 2*max.DD which was seen in testing. This would be 26%*2 = 52%.

I have been reminded that backtesting is not an exact science, and some allowance needs to be made for the system as the biggest maximum drawdown may well be in the future.

The pain realised during this drawdown, I have concluded, will be less than the pain realised if I was to close the system now right before the market takes off again.

And if the system does reach the newly defined shut off point, I will live to trade another day.

My system switch

Last weekend I did some backtesting using my new system switch.
The results were less than promising.

The test period I chose initially was one where I feel is a particularly good period for running backtests. Its from 01-01-1998 until 01-01-2003. The market index (XAO) returned 6.7% pa annualised.

Monte carlo analysis was done over 5,000 portfolios. Starting with $50,000, the averages were:

Without switch:
Number of trades: 179
Profit: $294k
Maximum drawdown: 7.95% (worst 17.5%)

With switch:
Number of trades: 88
Profit: $70k
Maximum drawdown: 13% (worst 31.9%)

As you can see, the number of trades taken were halved compared to no system switch, but obviously the trade expectancy did not make up for this, and as such the CAR was reduced significantly.

The switch, though I haven't tested it sufficiently as yet, I suspect may help my system when in a prolonged bearmarket. A quick glance of the long term performance of the market will tell you that stocks do not spend most of their time in a prolonged bearmarket.

So my conclusion at this point is to just weather the drawdown and keep on trading the system. The only assumption I am taking here is that at some point, maybe after 1,2,3 years, is that the market will assume its long term bullish bias. I have no reason to believe otherwise.

In the meantime, I am developing other systems that will compliment my long term trend following system. I am looking at the forex markets due to its low correlation to equities.

I am still playing with the switch trying to make it work. Results will be posted here when the tests have been done.

Portfolio Update 21/03/2008

CEY and NCM have triggered exits.

Nothing to buy next week.

Portfolio Update & Sector analysis

No buys were triggered for next week.

I'm starting a bit of work on sector analysis, and relative strength between sectors. The purpose of this work is to see which sectors are outperforming the market.

This sort of analysis can be used instead of (or in addition to) an index on/off switch, because such a switch used alone may keep you completely out of the market for a prolonged time in a bearmarket. This may not necessarily be a bad thing but it may deprive us of trading opportunities.

Take a look at property trusts during 2000-2002. Nothing staggering but a fairly significant outperformance of other sectors and of the general market.

The problem with this sort of stuff is that it's hard to backtest anything to do with index switches or sectors because you cannot really purchase historical index/sector constituents from anybody, as far as I am aware.

And it would take a hell of a long time to construct them yourself.

Or maybe we can purchase them from Standard & Poors?

Any suggestions?

Portfolio Update 07/03/08

NCM is to be purchased next week.

Portfolio Update 29/02/2008

Four stocks came up for next week: AGM, HER, JBM, and WPL.

But none will be purchased as the first 3 are under takeover and WPL hasn't met my pyramiding criteria (based on percent profit).

So looks like tomorrow I will get 10mins more time having lunch as I don't have to place any trades!