Quote Originally Posted by Pascal View Post
Therefore, the next idea was to select only five sectors when the 20DMF issued a signal and then from each of these sectors, get all the stocks AB/LER data and select the five stocks that were showing the best AB/LER combination. The results of such a test are shown below. These are also in line with the results I had two years ago. The table below show us that whatever efforts we can do to select specific stocks, it will be hard to beat a two time leveraged ETF that trades the 20DMF signals. Of course, specific stock trading might lead to lower DD (I did not calculate such DD.)
- Pascal, could you please clarify: Was it five stocks per sector, or total of five from all sectors? Was it buying when a 20DMF signal is issued, and holding until next short, or something else?

- on a first blush I am not sure I would dismiss that based on comparison to trading a leveraged ETFs. Since we can tailor the amount of leverage we take, It is all a matter of risk-reward; so depending on the downward volatility, the results could be just ho-hum, very good, or spectacular.

In 2011 many sector rotation systems did not work that great, and numbers like in the table are not to sneeze at (especially if it were 25 stocks total). Also seeing better relative performance in 2011 than in 2010 is intriguing. If it were me I would check further whether it is just a matter of beta of stocks - or maybe there is a significant edge here. If you indeed do check the risk (e.g. downward volatility) and it is not higher than the market - it might be worthwhile looking at hedged results, and also at results obtained with a different timing signal gating entry and exit. For diversification, it would be great to identify added value that is not fully correlated to the 20DMF.


.... The five best sectors are those that show the weakest price RS.
... I also short the five sectors that are the most overbought and I sell these positions 20 days later.
- Could you please clarify the specific selection criteria: For longs, is it weak RS only, or you look at money flow as well? The timeframe for RS - is it 20 days? For shorts, what is the definition of 'overbought' in this context? ... I am trying to understand how EV is used here, and whether we are looking at simple mean reversion at the sector level.

I have encountered in the past added value for mean reversion of individual stocks within a strong sector, and for longer timeframe sector momentum; this seems to be quite different and intriguing.