New Studies in Relative Price Strength

1. New Studies in Relative Price Strength Charles D. Kirkpatrick II, CMT www.charleskirkpatrick.com kirkco@capecod.net

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

3. 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.

4. 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).

5. Old Tests for Relative P2S 3-month results

6. Old Tests for Relative P2S 6-month results

7. Old Tests for Relative P2S 12-month results

8. Old Tests for Relative P2S Rising market

9. Old Tests for Relative P2S Declining market

10. 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.

11. Old Tests for Relative Price Strength 3-month results

12. Old Tests for Relative Price Strength 6-month results

13. Old Tests for Relative Price Strength 12-month results

14. Old Tests for Relative Price Strength Rising market

15. Old Tests for Relative Price Strength Declining market

16. 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

17. Results of Bargain List 2001-2008

18. Bargain List 2001-2008 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 -19.78% • Annualized Return 1.16% • Annual Turnover 192.86% • Max Drawdown -48.03%

19. 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

20. 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)

21. 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.

22. Low Price, Low Capitalization Stock

23. 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

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

25. 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 223.54% • Russell 3000 Return -19.78% • Annualized Return 17.26% • Annual Turnover 202.85% • Max Drawdown -47.93%

26. 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)

27. Market Risk

28. 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 -12.52% • Annualized Return 9.55% • Annual Turnover 323.91% • Max Drawdown -17.16%

29. Put Together

30. 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 665.53% • Russell 3000 Return -19.78% • Annualized Return 30.86% • Annual Turnover 410.31% • Max Drawdown -26.18%

31. Adjust Relative Parameters

32. 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 663.29% • Russell 3000 Return -19.78% • Annualized Return 30.81% • Annual Turnover 557.07% • Max Drawdown -20.23%

33. Add a Stop

34. 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 714.01% • Russell 3000 Return -19.78% • Annualized Return 31.93% • Annual Turnover 932.44% • Max Drawdown -13.46%

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

36. Since 2008 (10/25/09)

37. 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%

38. All together 2001-2009

39. 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%

40. New Studies in Relative Price Strength Charles D. Kirkpatrick II, CMT www.charleskirkpatrick.com kirkco@capecod.net