Portfolio Design

Advanced concepts in stock investment portfolio design.  Fundamentals, technical analysis and many other related topics are discussed.

Market Timer: Summary of Ranking System Factors

This post is a continuation of the Market Timer series, starting with Build A Market Timer Using High/Low Beta. I have selected several indicators for inclusion in the ranking system that will serve as the basis for a preliminary system. As I discover new indicators, they will be tested in conjunction with the existing indicators for compatibility.

Development tools provided by Portfolio123.


I have structured the layout for three classifications:  Economy-related, Technical Analysis, and Fundamentals as shown below. 

Screen shot of the layout of the Market Timer ranking system.

Screen shot of the layout of the Market Timer ranking system.

Economic Indicators

I currently have two indicators within the Economy classification: #UNEMP, and #TEDSPREAD.

Unemployment Rate (#UNEMP)

I am using a variation of the #UNEMP indicator identified by Georg Vrba of iMarketSignals.  His version uses the formula:  Close(0,#UNEMP)<Close(3,#UNEMP), where the offset 3 is in months. 

My variation is the following formula:  EMA(2,0,#UNEMP)<=EMA(2,3,#UNEMP). This variation provides some filtering for noise/unexpected revisions.  The formula when tested as an isolate, is not as good as the original, but in combination with the other indicators, actually improves the results.

Treasuries-EuroDollar Spread (#TEDSPREAD)

In the post Market Timer: Adding An Indicator, I selected a formula using #TEDSPREAD as a possible indicator for this project. I have now refined the formula to be:

(EMA(5,0,##TEDSPREAD)/EMA(20,0,##TEDSPREAD)<1.1|EMA(50,0,##TEDSPREAD)<0.5) & (EMA(50,0,##TEDSPREAD)/EMA(200,0,##TEDSPREAD)<1|EMA(50,0,##TEDSPREAD)<1)

An English translation of this formula is as follows: The equation can be broken into parts, both parts must be True otherwise the result is False.

Part 1: IF #TEDSPREAD is less than 0.5 OR the #TEDSPREAD is not rising fast in a short period of time THEN Part 1 is True, ELSE Part 1 is False.

Part 2: IF the #TEDSPREAD is less than 1.0 OR the #TEDSPREAD is declining at a slow rate THEN Part 2 is True, ELSE Part 2 is False.

The backtest for the combined economy factors is shown below (no slippage).

Screen shot of the backtest results for the combined Economy Indicators: #UNEMP and #TEDSPREAD

Screen shot of the backtest results for the combined Economy Indicators: #UNEMP and #TEDSPREAD

Technical Analysis Indicators

I am using two technical analysis factors, High Beta / Low Beta which was described in detail in Build A Market Timer Using High/Low Beta. The second TA factor is a market breadth indicator based on three month new highs versus new lows on the NYSE exchange. The backtest for the combined technical factors is shown below (no slippage).

Screen shot of the backtest results for the combined Technical Indicators: High Beta versus Low Beta and Market Breadth

Screen shot of the backtest results for the combined Technical Indicators: High Beta versus Low Beta and Market Breadth

 
 

Fundamental Indicators

I am sorry to say that the fundamental factors that I am employing are proprietary. I can say however, that they are aggregate fundamentals from selective (early recovery) sectors. The backtest results are shown below so that the reader can compare to his or her own results.

Screen shot of the backtest results for the combined Fundamentals

Screen shot of the backtest results for the combined Fundamentals

The factors shown above were selected not only for their isolated performance but their compatibility with other indicators i.e. their combined performance. Below is the backtest results for all factors combined with equal weighting (no slippage).

Screen shot of the backtest results for all indicators combined with equal weighting.  No slippage applied.

Screen shot of the backtest results for all indicators combined with equal weighting.  No slippage applied.

The average profit per trade is 4.84%, still less than ideal. The backtest result with 0.2% slippage per trade is shown below.

Screen shot of the backtest results for all indicators combined with equal weighting.  0.2% slippage per trade applied.

Screen shot of the backtest results for all indicators combined with equal weighting.  0.2% slippage per trade applied.

Next post I'll start getting into some market timing advanced topics.

Take care

Happy trading.