Building a Strategy Book via Portfolio123.com

O.k.

On the breakout front I took Shop and Celh last week:

I took of 50% on the SHOP trade selling into strength.

On the overall market I am neutral and I still think there is a great bull market looming the latest in 2024!

Back to my systematic trading with portfolio123.com —>

I tried to time different factor tilts and I failed miserably: switching cost from one to another model are just too high!

So the new attempt is the following: make sure you have diversified your factor tilts so at least one strategy in your book is doing well in Quad 1-3 and shallow Quad4.

Also make sure, that if a deep Quad 4 hits your models go partly into cash.

So here is how I did it (still watching the strategy book until I switch!).

First of all some background (I tested 1000s mainly nano to mid-cap systems and that are the general results):

·        Microcap Value (75% weighting) and Momentum (25%) are doing very well after a crash, run for a year or 1.5 years and then stall out and can have a streak of years where they are nerve killing to trade

·        Microcap Value Momentum with a quality tilt (high cash flow to assets total is the quality tilt) do especially well in a rising inflation environment (Quad 2 and 3) and they do not care about rising interest rates (they go up!).

·        Small to Mid-Caps (not micro caps) with a growth Tilt do well in when inflation goes down (Quad 1 and shallow Deflation, e.g., Quad 4 shallow)

·        Micro to small caps with earnings estimates up and heavy analysts upgrades do well in all environments, because if the environment is bad, analysts do not upgrade and therefore the system goes automatically into cash

·        High Beta ARKK long duration names do well in Quad1 and Quad2, but as soon as interest rates go up, they are in trouble

·        To avoid a deep Quad4 most of the models in my new book are only buying new stocks of the breadth is favorable, but not selling stocks that stay strong in a bad breath environment

So, in the bread and butter book I need the following factor exposures to be able to capture as much alpha as possible in the different cycles from Quad1-Quad3 and shallow Quad4 and avoid deep Quad4s with ample cash in the book!

Here are the systems of the book:

Small caps with an earnings tilt (play around with the earnings estimates of P123) —>

Micro to Small Caps with a quality tilt (free cash flow to assets total play a huge role + the system has a breath filter!):

Analyst Revision System(s) (here is one example):

This “kicker” systems are very important, they do not look much better than the other wider systems (e.g., with much more stocks), but they are extremely important to the performance of the overall book.

What happens here: First the system only finds stocks if small cap earnings are revised up! That only happens in good economic environments, if the environment is not good, this model goes to cash fast!

When the system finds stocks, those stocks often already in the other wider systems.

So what? Well, that means that those stocks then get a bigger weighting in the overall book. You expand the best names in the best economic environments, and you cut back if this system does not find any names. Very, very powerful!

Furthermore, all systems have a very wide factor ranking which makes sure you diversify the factors. Not all factors are favored by the market all the time, so diversification is key (tried to time factors, was not successful!).

So here is a factor ranking that is well diversified:

As you can see it has all the “big” factors in it: Momentum, Industry Momentum, Quality, EPS up revisions, Value etc.

I cannot give my IP on this ranking, but it is also important that the nodes for example for Stock Momentum also diversify: So, momentum on stocks are spread out (and weighted equally) on for example 3 Month, 6 Month, 9 Month momentum!

Now the conclusion:

In a good book 2+2 = 6 and not 4!

The above book has better performance and less DD than its component strategies (because they are well balanced with different factor tilts, the goal is to make sure that there is always at least one or two strong strategies in the book from Quad1 to shallow Quad4 and that the systems go mainly into cash in bad breath environments or in environments where micro caps and small caps get no positive eps revisions).

So, all in all a bread-and-butter system book with balanced factor tilts make the trick.

O.k., now what happens if we get a blazing Bull Market, a deep Quad2 like in the second half of 2021?

Then you can add high beta Systems to your system book:

Those high beta runs are seldom and are dangerous, as I have written, get out as soon interest rates (not inflation, they do not care until the fed reacts!) go up! They have super run every 20 Years, but that one can be powerful!

Another kicker cold be a micro-cap model after a super deep crash (at least 30% on the SPY!):

This post sums up all the stuff I learned since I took on the probe of beeing a full time trader.

Now I get another question: Yes, all nice, but all those models are capacity constricted.

YES, YES, YES, the above book is only tradable with up 1-2 million overall account size!

Well first of all, if I get there I will be very happy.

Second, if I get there and squese out lets say 40% after tax from a 1 Million account and reinvest the overshoot every year to more liquid systems like this, I will be a very, very happe men:

Or I just cost average into the SPY, or I buy real estate, or whatever!

I know this post does not give away a ton of IP on how to actually do it.

But if you want to be a systematic trader and do the work via for example portfolio123.com it shold give a good start. I wold have killed for this information 3 years ago!

Still a warning: I am designing systems since a long, long time and it is a rabbit whole.

Do not do it if you do not love to design systems!

All the best and best regards

Andreas

Disclaimer:

The information on from Andreas Himmelreich / QuantStrike and this video / blog is for information and discussion purposes only. It does not constitute a recommendation to purchase or sell any financial instruments or other products. Investment decisions should not be made with this video, and one should consider the investment objectives or financial situation of any person or institution.

Investors should obtain advice based on their own individual circumstances from their own tax, financial, legal and other advisers about the risks and merits of any transaction before making an investment decision, and only make such decisions based on the investor’s own objectives, experience, and resources.

The information from Andreas Himmelreich / QuantStrike and this video / blog is based on generally available and paid information and, although obtained from sources believed to be reliable, its accuracy and completeness cannot be assured, and such information may be incomplete or condensed. All performance results are hypothetical and the result of back testing only. Out-of-sample performance may be different. No claim is made about future performance.

Investments in financial instruments or other products carry significant risk, including the possible total loss of the principal amount invested. Andreas Himmelreich / QuantStrike and this video / Blog do not purport to identify all the risks or material considerations which may be associated with entering any transaction. Andreas Himmelreich / QuantStrike and this video / blog accepts no liability for any loss (whether direct, indirect or consequential) that may arise from any use of the information contained in or derived from Andreas Himmelreich / QuantStrike and this video / blog.