New Studies in Relative Price Strength

Charles D. Kirkpatrick II, CMTwww.charleskirkpatrick.com

kirkco@capecod.net

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 methods4. Show new market direction methods5. Show new factors6. Adjust old and new factors for new data base

Old Tests

• Period 1998 – 2006• 8,073 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 < 42 to buy, > 67 to sell (value screen).

Old Tests for Relative P2S3-month results

Old Tests for Relative P2S6-month results

Old Tests for Relative P2S12-month results

Old Tests for Relative P2SRising market

Old Tests for Relative P2SDeclining 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 Strength3-month results

Old Tests for Relative Price Strength6-month results

Old Tests for Relative Price Strength12-month results

Old Tests for Relative Price StrengthRising market

Old Tests for Relative Price StrengthDeclining market

Selection and Deletion Criteria

• Selection: (all necessary)– Relative price strength percentile >= 97– Relative P2S percentile <= 42 or >= 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 2001-2008

Bargain List 2001-2008

Results (period 3/31/2001 – 10/25/2008Russell 3000, price $5, mkt cap $1000 mil, RS buy-97,

sell-52, P2S buy-42, sell-67

– Total Return 9.13%– Russell 3000 Return -19.78%– Annualized Return 1.16%– Annual Turnover 192.86%– Max Drawdown -48.03%

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)

SolutionMarket 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

SolutionStock 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)

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

Results (period 3/31/2001 – 10/25/2008Russell 3000, price $2, mkt cap $100 mil, RS buy-

97, sell-52, P2S buy-42, sell-67

– Total Return 223.54%– Russell 3000 Return -19.78%– Annualized Return 17.26%– Annual Turnover 202.85%– Max Drawdown -47.93%

Market Risk

• Use Russell 3000• Random select stocks• Market cutoff criteria– Buy all stocks when Russell 3000 15-day sma <=

Russell 3000 63-day sma.– Sell all stocks when Russell 3000 15 day sma <=

Russell 3000 63-day sma. (30-day cycle and 26-week cycle)

Market Risk

Market Risk

Results (period 3/31/2001 – 10/25/2008Russell 3000, price $2, mkt cap $100 mil, 100 stocks

selected randomly

– Total Return 99.73%– Russell 3000 Return -12.52%– Annualized Return 9.55%– Annual Turnover 323.91%– Max Drawdown -17.16%

Put Together

Put it Together

Results (period 3/31/2001 – 10/25/2008Russell 3000, price $2, mkt cap $100 mil, old stock

criteria method, market risk method

– Total Return 665.53%– Russell 3000 Return -19.78%– Annualized Return 30.86%– Annual Turnover 410.31%– Max Drawdown -26.18%

Adjust Relative Parameters

Adjust Relative Parameters

Results (period 3/31/2001 – 10/25/2008Russell 3000, price $2, mkt cap $100 mil, new stock

criteria method, market risk method

– Total Return 663.29%– Russell 3000 Return -19.78%– Annualized Return 30.81%– Annual Turnover 557.07%– Max Drawdown -20.23%

Add a Stop

Add a Stop

Results (period 3/31/2001 – 10/25/2008Russell 3000, price $2, mkt cap $100 mil, new stock

criteria method, market risk method, % stop

– Total Return 714.01%– Russell 3000 Return -19.78%– Annualized Return 31.93%– Annual Turnover 932.44%– Max Drawdown -13.46%

Summary

Method Total Return Max DD RatioOrig method 9.13% -48.03 0.2Adj price, mkt cap 223.54% -47.93 4.7Market method 99.73% -17.16 5.8Together 655.53% -26.18 25.0Adj parameters 663.29% -20.23 32.8Add sell stop 714.01% -13.45 53.1

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 1164.41%– Max Drawdown -14.93%

All together 2001-2009

All together 2001-2009

Results (period 3/31/2001 – 10/25/2009

– Total Return 1,570.23%– Russell 3000 Return 0.80%– Annualized Return 38.93%– Annual Turnover 1,013.58%– Max Drawdown -15.74%

New Studies in Relative Price Strength

Charles D. Kirkpatrick II, CMTwww.charleskirkpatrick.com

kirkco@capecod.net