Shorting stocks which are ranked #5 in VL and Zacks
I'm a lurker here, usually, but I've been playing with a mechanical shorting strategy that I thought you folks might be interested in. Posted it in the "Mechanical Aspects" thread (since it didn't fit anywhere else), but it picks stocks which are breaking down.
I sub-select from the stocks ranked 5 (worst) in Value Line using the Zacks rankings (that is, I choose the stocks which are #5 in both VL and Zacks).
In my first test (beginning 4/27, not with real money), I sold short 18 stocks which were ranked #5 in both Zacks and VL, and bought the equivalent amount of SPY (to simulate a real market-neutral portfolio). It is now three months since I began this test. For the period since 4/27, SPY is up 4.0% and the shorts are down 19.7% - so the total return from a completely hedged portfolio for the last 2 months would be 23.7% (these are period returns over three months). All positions were purchased/sold short at the worst price of the day, no commissions were included, and dividends were ignored.
In a second test (beginning 6/10, using real money), I sold short 10 stocks which were ranked #5 in both Zacks and VL and had dividend yields below 3%. I left out 2 more for which I could not borrow shares that day. I have since added to this portfolio, shorting 5 more stocks on 6/29, and 5 more on 7/13. I will now short stocks with up to a 4% dividend yield. I have also covered 2 of the original shorts at small losses (one of which, Boeing, subsequently went down sharply :-). The short sales from 6/10 have made 12.6% (including the losses from the covered positions), those from 6/29 have made 10.4%, and the ones from 7/13 have lost 0.2%.
Caveats: I think the market environment is unusually favorable (bad market breadth favoring big-cap S&P average, and poor RS stocks being sold at quarter end window-dressing) Nevertheless, it looks promising, and I intend to continue playing with it. I intend to update quarterly, so I will roll over the test portfolio sometime this week.
The purpose of this experiment is to allow me to utilize available margin in a way which reduces market risk, and possibly adds somewhat to returns, without a large time commitment.
Don Katz |
