The main focus of this blog is a place where I can share my trading ideas and research. I hope that posting to a blog will impose a writer's discipline on my trading (see Hemmingway's 'A Moveable Feast'. As I recall, there is a chapter titled 'Writing is good discipline'). Frankly, my trading has been undisciplined for years, and this blog is part of my commitment to change that.
The first topic I want to explore is the Investor's Business Daily 100. I'm an online subscriber to IBD, and would recommend it to anyone interested in stock investing/trading. I've read William O'Neil's books, and feel that they've improved my stock trading performance. But here's the problem, I feel like O'Neil's books have helped me, but I haven't tested it systematically.
Well...perhaps I can say that the improved performance is something stronger than a feeling. Before reading O'Neil, I liked to trade stocks that broke out on above average volume. (I'll go into the exact parameters in later posts). I used to TeleChart to screen for them these breakouts and sort them into watchlists. The watchlists performed fairly well, but the criteria generated too many hits. So my process for selecting from the watchlists was sort of ad hoc. The performance of my selections consistently lagged the broader watchlists.
Then I read O'Neil, and started applying some CANSLIM criteria to my filtering. My results began to improve. I think as a general statement, one can say that CANSLIM is a hybrid methodology using technical and fundamental analysis to select growth stocks. Intuitively, if you believe in investing in or trading growth stocks, then O'Neil's methodologies ought to be helpful.
My performance did improve when I started applying some O'Neil methodologies. But honestly, I didn't apply them systematically. It could be luck. What's more, I didn't start doing so fabulously well that I felt I'd found the holy grail. So, I have to say that my gut feeling is that O'Neil methodologies work. But I have no quantitative evidence to support this. Furthermore, I couldn't say which parts of it worked, and how well.
So, I'm committing myself to a more systematic approach to evaluating O'Neil methodologies. I'll be re-reading O'Neil's books, and presenting my ideas about what and how to test. But my recollection is that O'Neil and IBD claim that their methodologies were born of extensive research, but they don't present their data. Nor do they describe applications of their methodologies in ways that are testable. They are presented more as heuristic frameworks, than as testable, mechanical rules.
I'm not one of those people who is committed to mechanical systems (although I may become one, depending on how this project goes). But if you can only back test criteria that are algorithmic. I'll be re-reading O'Neil's books and CANSLIM articles in IBD, to come up with ways to test their methodologies.
My first area of research will be the IBD 100 stocks. Each week, IBD publishes a list of 100 stocks which it refers to as the market "leaders". IBD recommends watching the leading stocks to gauge the market's health. In general, IBD recommends buying the leading stocks, at proper entry points, when the market is rallying.
But what exactly do they mean by leaders? Is it just that these are stocks which will do better in a bull market, or is there something actually predictive their price action? My gut feeling is that both are true to some extent. I fell that in my own trading, when I've owned IBD 100 stocks in my portfolio, and those stocks started to perform badly, the broader market tended to follow. But is that really the case, or is it just something I imagined? This is the first question I want to explore.
Starting last Friday, July 13, 2007 (good thing I'm not superstitious), I created a model portfolio of the IBD 100 stocks, with an initial balance of $100,000. I allocated $1000 dollars to each stock, and bought (on paper) as many whole shares of each stock as I could for $1000. The remainder stayed in cash. When the new IBD 100 list came out on Friday, July 20, I sold the 13 stocks which were dropped from the list, divided my cash balance by 13, and bought that much of each of the 13 new additions.
Investor's Business Daily does not recommend doing this in real life. I don't remember when, but I'm pretty sure they've explicitly pointed this out as something not to do. In my next post, I'll explain why IBD says you shouldn't do this with real money, and some of the reasons why I think it may not be a good idea in practice. (But who knows, maybe it will actually turn out to be profitable anyway? Keep checking back and we'll find out together). I'll provide details of the performance of the portfolio.
I'm also planning to create an equal weighted index of the IBD 100 components. I'm in the process of writing the code for this now (It's surprisingly tedious code. It's not complicated, but there are a lot of little, time consuming methods to write).
So, look forward to portfolio and index results. I'll also be working on improving the look and feel of the blog.
S&P 500 down 51.78!
Wow.....what a vicious sell off! Days like this always put a knot in my stomach. Here's a harrowing admission: I was short OEX puts on Black Monday in 1987! I learned a painful lesson about selling naked premium and have never done it since.
I wish I could say I was short or even flat going into today, but I'm not. I'm roughly 85% long, with the rest in cash. I bought EMC yesterday at 19.05, and bought some more today at 18.50. Very nerve wracking.
As of yesterday's close, the IBD 100 Portolio had lost 3.6% since it's inception. Not much change from the Close of the 24th. I expect it will be sharply lower at today's close. Once I get the index coded, it will be interesting to see if the price action of the 1BD 100 stocks gave any forewarning of this market decline.
Posted at 03:17 PM in IBD 100, Market Comments | Permalink | Comments (0) | TrackBack (0)