>>One parameter that might be worth playing with is your yield limit. How did you choose 3%? The S&P yields 1.4%. Does your limit actually eliminate many of the stocks in your universe?<<
Yes. On the one hand it eliminates utilities and the occasional LP, neither of which you'd want to short anyway. On the other hand, it eliminates some stocks which have dropped so far that their dividend yield is very high - for example Betz-Dearborn (BTL). I'm not sure it is a good idea to eliminate the latter group - limited observations suggests that they continue to decline. That is why I decided to begin accepting stocks with slightly higher yields (3.5-4%) (and in fact added BTL to my real money shorts on 7/13, and it has fallen 10% since then).
The cut-off was arbitrary - I don't expect this strategy to make a lot of money over time - but if it can break even or better I've greatly reduced market risk at no cost. So I wanted to limit the paid out dividends to 1% a quarter.
However a value screen might be a good idea. Many of these stocks have P/Es on estimates of 8-10-12. At some point these are value stocks - in fact, when I look at the stocks sometimes I make a note to look at them more carefully as possible longs :-). I thought about using P/E (VL shows it on the same page) as a final screen (to reduce the 20 or so VL5xZ5 stocks to 10).
So far, though, these stocks seem to confirm the cockroach approach - bad news begets more bad news.
Some other notes:
VL is pretty slow to move stocks to rank 5 - there's only one semi equip there so far, and it showed up this week (PRIA). So I suspect the VL 5 list has more stocks with real long-term problems (e.g Sunbeam) than the Zacks list - VL5 might even be a good starting point to look for stocks with real problems (Callaway, National Semi, Sunbeam, Olsten are on the list).
Shorting bigger companies reduces volatility - in trials with other ideas (Trendvest x Z5, or sorting Z5 by low relative strength), it is clear that the individual stocks and the overall portfolios move up and down a lot more. My worst loss on any stock at any time so far in the VL5 based portfolios was only about 25%. As of today, of 20 stocks in the 4/27 portfolio, only 2 are up since shorted, and the worst loss is only 6%. 3 stocks are down more than 40% (Callaway Golf, Oxford Health, and National Semi). In the real money portfolio (sales on 6/10, 6/29, and 7/13), only 2 of 20 stocks I shorted show losses (price increases), one negligible, and one 15%. There are 12 stocks which have fallen in price more than 10%, and 4 more than 20%.
The mechanical portfolios I looked at with smaller stocks (e.g. Z5 by RS, started on 7/6) has two stocks whose price has increased more than 30%, 6 that have fallen more than 20%, and an overall gain of 6.5%.
Don |
