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Strategies & Market Trends : Shorting stocks: Mechanical aspects -- Ignore unavailable to you. Want to Upgrade?

To: Harpo who wrote (108)	8/28/1998 4:41:00 PM
From: Banjoman	Respond to of 172

>>I would like to take a look at the screen you described, I had trouble finding the Zacks rankings (for free). Where might I find the info? Thanks for your excellent posts. and thanks, Ben << Zacks #5 is not available for free. Cost is just over $100/year. An alternative that I am playing with is just picking the lowest RS stocks in the VL #5 group. Note that history of VL #5 indicates that it tends to underperform Z #5 as a group. Here is an update I put together for myself as of Wednesday for the VL 5/low RS strategy: On 6/10, Robert Sheard's daily column on Motley Fool (www.fool.com),discussed the idea of selling short the lowest relative strength VL stocks with timeliness rank 5. I have constructed a portfolio based on this idea, and wanted to share initial results (from the first month). I sold short $10,000 of each stock at the closing price on 6/10 (except for one stock which closed at the daily high, that stock I sold short at the day low - in real life you aren't going to be able to sell short at the day high, since you are normally selling at the bid). I eliminated 4 stocks because they closed on 6/10 below $5 (BOST, AMI, GOU, and TTX), and one stock because it is a foreign stock traded in the pink sheets and can't be sold short (COTTF). Normally you don't sell stocks below $5 short because you have to put up cash to make the trade. I also made a portfolio of an equivalent amount of SPYders, purchased on 6/10 at the close. In principle, you could move $150,000 to an investment account, purchase $150,000 of SPYders and then sell short the 15 VL stocks. The real return on this strategy is the gain from the SPYders plus the gain (or minus the loss) from the short sales. Percent change: One month Two months to 8/26 VL reverse RS (short sales) +3.65% +13.3% +20.1% SPYders +4.60% - 2.1% - 2.4% Total long/short +9.25% +11.2% +17.7% Russell 2000 +2.80% - 7.1% -14.7% (R2000 was at about 446 on 6/10) In other words, VL Reverse RS portfolio underperformed the Russ2000 by 6.45% in first month, and outperformed the Russ2000 by 0.25% in the second month, and outperformed the Russ2000 by 0.8% to 8/26, for a total underperformance of 5.4% over just under three months.

To: Harpo who wrote (108)	8/28/1998 4:45:00 PM
From: Banjoman	Read Replies (1) \| Respond to of 172

Here is the most current update on the VL5xZ5 strategy: I've been playing with a mechanical shorting strategy, with the following parameters: Rather than using relative strength to sub-select from the VL stocks with timeliness rank 5, I sub- select using the Zacks rankings (that is, I choose the stocks which are #5 in both VL and Zacks). Then, since I am interested in using this strategy as a hedge or market-neutral strategy, I combine the short sales with the purchase of an equivalent amount of SPYders. I reported on this strategy previously on AOL MF boards and in the shorting threads on Silicon Investor. This is an update at month 4 (as of closing prices 8/26). 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. It is now four months since I began this test. For the period since 4/27, SPY is down 0.7% and the shorts are down 27.8% - so the total return from a completely hedged portfolio for the last 4 months would be 27.1% (these are period returns over four months). All positions were purchased/sold short at the worst price of the day, no commissions were included, and dividends were ignored. From 4/27 to the present, the Russell 2000 lost 20.8%, so a portfolio constructed with Russell 2000 on the long side, and the VL 5 shorts on the short side would be up 7% over the past 4 months. Here are the returns by month (cumulative): 2 mos 3 mos 4 mos Shorts +12.4% +19.7% +27.8% SPY + 4.0% + 4.0% - 0.7% Rus2000 - 6.3% -10.4% -20.8% 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. On 7/13, I included stocks with higher dividend yields (to 4%) to my immense regret, since one such stock (Betz- Dearborn) was taken over at a large premium. I have also covered 2 of the original (6/10) shorts at small losses based on positive news reports, one of which (Boeing) subsequently went down sharply :-). The short sales from 6/10 have made 20.9% (including the losses from the covered positions), those from 6/29 have made 19.4% (including one stock covered at a 9% loss due to a takeover), and the ones from 7/13 have lost 6.1% (including the stock on which I lost 75% due to a takeover). The total market neutral portfolio with SPY bought in equivalent amounts each time I shorted stocks, would be up 10.2% (the shorts have gained 14.4%, the SPY has lost 4.1%). If instead the Russell 2000 were bought in equal amounts, the market-neutral portfolio would have lost 1.2% (in other words, my real-money shorts didn't drop quite as much as the Russell 2000 over the same periods). Don Katz