New Studies in Relative Price Strength Charles D. Kirkpatrick II, CMT

What I’m Going to Cover 1.Look at old studies from book “Beat the Market” 2.Assess how the triggers developed then have behaved since 3.Review market direction methods 4.Show new market direction methods 5.Show new factors 6.Adjust old and new factors for new data base

Old Tests Period 1998 – ,073 stocks weekly 290,594 weekly observations Projected relative strength percentile out 3, 6, and 12 months into the future to measure performance of stock’s weekly relative price and price-to-sales percentile. Summarized results. Decided on optimal buy and sell triggers.

Old Studies Best Screen from book: “Beat the Market” – Best list from all stocks that have a market cap > $1billion. – Price above ten, and relative price strength only calculated on stocks that have traded about $5 for 26 weeks. – Relative price strength percentile > 97 for buy, < 52 for sell (price screen). – Relative price-to-sales ratio 67 to sell (value screen).

Old Tests for Relative P2S 3-month results

Old Tests for Relative P2S 6-month results

Old Tests for Relative P2S 12-month results

Old Tests for Relative P2S Rising market

Old Tests for Relative P2S Declining market

Old Tests for Relative P2S Results : – Relative price to sales was a viable selection criteria with statistically useful results. – Stocks with relative P2S percentiles greater than 42 and less than 17 were the best picks. – Stocks with relative P2S percentiles greater than 67 should be deleted from any portfolio.

Old Tests for Relative Price Strength 3-month results

Old Tests for Relative Price Strength 6-month results

Old Tests for Relative Price Strength 12-month results

Old Tests for Relative Price Strength Rising market

Old Tests for Relative Price Strength Declining market

Selection and Deletion Criteria Selection: (all necessary) – Relative price strength percentile >= 97 – Relative P2S percentile = 17 – Market cap >= $1 billion and Price >= $10 Deletion: (only one necessary) – Relative price strength percentile <= 52 – Relative P2S percentile >= 67 or <= 7

Results of Bargain List

Bargain List Results (period 3/31/2001 – 10/25/2008 Russell 3000, price $5, mkt cap $1000 mil, RS buy-97, sell-52, P2S buy-42, sell-67 – Total Return 9.13% – Russell 3000 Return % – Annualized Return 1.16% – Annual Turnover192.86% – Max Drawdown %

Market Risk Can use moving average crossovers Sliding in and out – 25% on cross of 13-week sma – 25% on cross of 26-week sma – 50% on cross of 52-week sma Golden cross – 100% on 50-day crossing the 200-day sma

Problems List performance (equity curve) – flat Number of stocks fluctuates with signals Too few stocks and too high initial price (done to limit number of stocks in list to a small number) Price limit for RS calculation too high (s/b < $5) Many stocks not deleted soon enough Comparison to market not equivalent (apples to apples) Drawdown still large Market risk not sensitive (sluggish to turn)

Solution Market Risk Use Russell 3000 as the universe and performance comparison. Run random selection of Russell 3000 stocks and test market risk avoidance methods. (Result should be method that can be used in any portfolio selection model). Make criteria sensitive to market turns.

Low Price, Low Capitalization Stock

Solution Stock Selection and Deletion Lower minimum price to $2 Lower minimum market cap to $100 million Lower back testing price to $0.01 Adjust RS selection and deletion triggers Adjust P2S selection and deletion triggers Add a percentage stop to cover periods between weeks

Stock Method (old criteria, new price and market cap)

Results (period 3/31/2001 – 10/25/2008 Russell 3000, price $2, mkt cap $100 mil, RS buy- 97, sell-52, P2S buy-42, sell-67 – Total Return % – Russell 3000 Return % – Annualized Return 17.26% – Annual Turnover202.85% – Max Drawdown %

Market Risk Use Russell 3000 Random select stocks Market cutoff criteria – Buy all stocks when Russell day sma <= Russell day sma. – Sell all stocks when Russell day sma <= Russell day sma. (30-day cycle and 26- week cycle)

Market Risk

Results (period 3/31/2001 – 10/25/2008 Russell 3000, price $2, mkt cap $100 mil, 100 stocks selected randomly – Total Return 99.73% – Russell 3000 Return % – Annualized Return 9.55% – Annual Turnover323.91% – Max Drawdown %

Put Together

Put it Together Results (period 3/31/2001 – 10/25/2008 Russell 3000, price $2, mkt cap $100 mil, old stock criteria method, market risk method – Total Return % – Russell 3000 Return % – Annualized Return 30.86% – Annual Turnover % – Max Drawdown %

Adjust Relative Parameters

Results (period 3/31/2001 – 10/25/2008 Russell 3000, price $2, mkt cap $100 mil, new stock criteria method, market risk method – Total Return % – Russell 3000 Return % – Annualized Return 30.81% – Annual Turnover % – Max Drawdown %

Add a Stop

Results (period 3/31/2001 – 10/25/2008 Russell 3000, price $2, mkt cap $100 mil, new stock criteria method, market risk method, % stop – Total Return % – Russell 3000 Return % – Annualized Return 31.93% – Annual Turnover % – Max Drawdown %

Summary MethodTotal Return Max DD Ratio Orig method 9.13% Adj price, mkt cap % Market method 99.73% Together % Adj parameters % Add sell stop %

Since 2008 (10/25/09)

Since 2008 Results (period 10/24/2008 – 10/25/2008 – Total Return 84.82% – Russell 3000 Return 9.48% – Annualized Return 84.9% – Annual Turnover % – Max Drawdown %

All together

Results (period 3/31/2001 – 10/25/2009 – Total Return 1,570.23% – Russell 3000 Return 0.80% – Annualized Return 38.93% – Annual Turnover1,013.58% – Max Drawdown %

New Studies in Relative Price Strength Charles D. Kirkpatrick II, CMT