Stitts Wealth Ranking System

Stitts Wealth Ranking System

Models represent hypothetical or simulated performance, not actual trading. Since the trades have not actually been executed, the results may have under-or-over compensated for the impact of certain market factors, such as liquidity or historical bias. Remember that past returns are no guarantee of future returns. Please read the Disclaimer prior to browsing this site.

Stitts Wealth Ranking System

Description

The Stitts Wealth Ranking System was developed to address the large capitalization, high liquidity portion of the U.S. stock market, specifically the Dow Jones Industrial Average (DJIA), Standards and Poor Large Cap 500 (S&P 500) Index and the higher liquidity portion of the S&P Mid Cap 400 Index.

The ranking system is the result of the merging of two recent developed ranking systems, both of which are powerful in their own right. The combination of the two ranking systems provides better more consistent performance, consisting of 35+ factors, repeated 3X (for Universe, Sector and Industry).

For the purposes of evaluation, the S&P 500 is considered "in sample" since all development and optimization was based on this particular index. Other stock universes that do not include S&P 500 stocks are considered "out of sample". Such universes include the S&P Mid Cap 400, S&P Small Cap 600, PRussell 2000, Portfolio123 Mid Cap, Portfolio123 Small Cap and Portfolio Micro Cap stock universes.

Methodology

Every model developer has his or her own system development philosophy and method for addressing the problem of over-optimization. While many other developers use 200 ranking system buckets for development and test, it is my opinion that such fine resolution leads to the danger of "data mining" or over-optimization. The danger lies in the minimal number of samples in the top bucket, leading to ranking system optimization based on historical noise. While this technique undoubtedly leads to some pretty incredible backtest results, it may not translate into forward looking performance. It may actually be dangerous to model buy/sell rules (and hedging for that matter) based on such over-optimization.

For the reasons mentioned above, the Stitts Wealth Ranking System has been developed using 20 ranking system buckets, except where noted. This has been done to minimize the possibility of "data mining".

Performance 1999-2013*

Ranking system performance tests were conducted using standard Portfolio123 tools using weekly rebalance and 20 buckets (except DJIA Universe). The test end date is August 28, 2013.

Standards and Poor Stock Universes

The S&P Indices were the main focus of attention during development as these stock universes are historically correct with no survivorship bias.  The S&P Indices are made up of quality U.S. (or international) stocks with good liquidity and stock price (ie. no penny stocks).  There are no Pink Sheets, foreign stocks or Master Limited Partnerships (MLPs) listed on the S&P Indices.  

Unlike companies on a stock exchange, Pink Sheets system do not need to meet minimum requirements or file with the SEC. Pink sheets are also referred to as Over The Counter (OTC) trading.

MLPs are a unique investment class. They generate a type of income called unrelated business taxable income (UBTI). The associated taxmakes holding MLPs unsuitable for IRAs or other tax-deferred accounts.

S&P Stock Universes

S&P 1500 Stock Sector Universes

Year-by-year S&P 1500 Universe

S&P 1500 Style Universes

Portfolio123 Stock Universes

Portfolio123 has generated a unique set of stock universes in order to satisfy various investor needs, including PRussell (Russell equivalent) stock universes, market capitalization and other miscellaneous universes.  

The PRussell 1000/2000/3000 series of stock universes are meant to emulate the corresponding Russell 1000/2000/3000 universe, thus providing equivalent universes with no survivorship bias.  Be forewarned however that the PRussell stock universes are not identical to Russell.  Although they both have similar selection rules, there are instances where stocks fall on hard times but are not removed from the PRussell universe(s) at the same time as the Russell universe(s). Always use minimum liquidity and price rules when developing models based on PRussell 1000/2000/3000.  (This should be standard practice anyway).

The market capitalization universes are Large Cap, Mid Cap, Small Cap and Micro Cap universes defined by Portfolio123.  The do not follow any accepted industry standards but are useful none-the-less. 

Miscellaneous universes consist of the Portfolio123 "All Fundamentals", "No Over The Counter" and "Over The Counter Exchange".  All Fundamentals is a universe of all companies with fundamental data at a specific moment in time.  Thus you will be guaranteed of having fundamental data at the time period you are testing for if the stock is in the universe.

PRussell Stock Universes

Market Capitalization

Miscellaneous

Major Stock Exchanges

The major stock exchanges are all US-based and consist of the Dow Jones Industrial Average (DJIA), New York Stock Exchange (NYSE), NASDAQ and American Exchange (AMEX). The DJIA only has 30 stock listed so the performance graph utilizes 3 buckets instead of the nominal 20 buckets.

US Exchanges