Post #5188 by Taz2 on the Mechanical Investing board

Investment Strategies / Mechanical Investing

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There's an article in this week's Economist summarizing an investment paper by Adam Parker of Trivariate Research which posits:

a) when Brent Crude oil prices rise by more than 35% within 3 months,
b) lower quintile S&P500 stocks perform significantly better than the overall S&P500 over the following 6 months. He defines the lowest quintile quality-wise as companies in discretionary goods, financial services, and health care.

It would be interesting to backtest this, given the current investing climant. I've started working on a P123 screen.

Taz

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No. of Recommendations: 17

I went ahead and ran the numbers as follows:

1. The first day when Brent Crude pops from a 3-Month low by 35% a signal is issued and held for six months
2. New 35% pops in Brent prices produces a new signal and an extension of another six months

During the "bearish" periods - after a pop of 35% and a hold of six months the returns are (based on CAGR):

Investment                                      Symbol  Bearish
Spdr Select Sector Fund Materials               XLB     11.36%
Spdr Select Sector Fund Consumer Discretionary  XLY     9.58%
Spdr Select Sector Fund Energy Select Sector    XLE     9.38%
Spdr Select Sector Fund Industrial              XLI     9.32%
Spdr Select Sector Fund Utilities               XLU     8.72%
Spdr Select Sector Fund Health Care             XLV     6.90%
Spdr Select Sector Fund Consumer Staples        XLP     6.81%
Spdr Select Sector Fund Financial               XLF     5.93%
Spdr Select Sector Fund Technology              XLK     4.51%
S&P 500                                         ^GSPC   3.85%

In contrast, during the bullish periods - when the above is NOT true:

Investment                                      Symbol  Bullish
Spdr Select Sector Fund Technology              XLK     12.09%
Spdr Select Sector Fund Consumer Discretionary  XLY     9.58%
Spdr Select Sector Fund Industrial              XLI     9.49%
Spdr Select Sector Fund Health Care             XLV     9.10%
Spdr Select Sector Fund Energy Select Sector    XLE     8.67%
Spdr Select Sector Fund Utilities               XLU     7.60%
Spdr Select Sector Fund Consumer Staples        XLP     6.76%
Spdr Select Sector Fund Materials               XLB     6.67%
Spdr Select Sector Fund Financial               XLF     5.50%
S&P 500                                         ^GSPC   8.76%

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No. of Recommendations: 5

I generated this simple P123 screen to test the article's thesis:

P123 Stock Universe: S&P500

Close(0,30821) > 1.35 * Close(60,30821) //Brent Crude Price Spiking
Sector=CYCLICALS Or Sector=ENERGY Or Sector=HEALTHCARE

Using P123's Classic Quality ranking system to select the top 6 stocks. A 5-year weekly rolling backtest with stocks held for 6 months did not beat the S&P500. During down markets it did perform better than the S&P but it still lost money.

NOTE: 30821 is the Stock ID for Proshares Ultra Bloomberg Crude Oil. I needed something to emulated the daily crude price movement that P123 would recognize.

Taz

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