Wednesday, April 14, 2010

MarketSci on the Stock of the Week ‘Sequential Portfolio’

In case anyone missed it, I thought I should highlight an excellent discussion of the Stock of the Week ‘Sequential Portfolio’ by Michael Stokes at MarketSci. In my opinion, Michael’s blog is required reading for anyone who is interested in a technical discussion of trading systems and approaches to developing trading strategies. Frankly, I was delighted that he decided to put the Stock of the Week (SOTW) through the paces.

MarketSci’s Review of the VIX & More Stock of the Week examines performance based on a buy at the open at the beginning of each week and a sell at the close each Friday. This is different from the Friday close to Friday close data I have always reported in my subscriber newsletter, because I always wanted to report a cost basis in the newsletter on Sunday and assumed that if I avoided stocks which had news over the weekend, the difference between using a Friday close vs. a Monday open as a cost basis would not be meaningful in the long run.

For the first year or so, the difference between Friday’s close and Monday’s open was not meaningful. During the rally from the March 2009 bottom, however, a good portion of the gains for stocks have come on Mondays. Earlier this week, Business Week cited data from Bespoke Investment Group which attributes all of the gains in stocks over the course of the past six months to Mondays, with 80% of all Mondays being up days during this period.

In addition to the rise of ‘Magic Mondays,’ the SOTW also was prescient enough to flag Bell Microproducts (BELM) as a SOTW selection the day before Avnet (AVT) agreed to acquire the company for a 29.2% premium over Friday’s closing price two weeks ago. Unfortunately, the acquisition was announced before BELM opened for trading on Monday. After some deliberation, I included the acquisition-related gains in the performance data rather than rewrite the rules for tracking the performance of this portfolio after nine quarters of adhering to one set of standard practices.

By all means, click through and see what MarketSci has to say about the Stock of the Week. By his calculations, a Monday to Friday holding period has yielded a 103.9% annualized return during a period in which the S&P 500 index has lost money. While a one stock ‘portfolio’ can hardly be considered anything less than high risk, I was also pleased to see the stellar 1.83 Sharpe ratio, which is a standard measure of risk-adjusted performance.

For the record, this week’s SOTW selection, UFS, is up 4.3% for the first three trading days of the week. Last week, IPSU delivered an 8.7% return for the week. (Both calculations utilize Friday’s closing price as the cost basis.)

For more on related subjects, readers are encouraged to check out:

…or pay a visit to the VIX and More Subscriber Newsletter Blog and the most recent post, Newsletter and Portfolio Performance Update for 3/31/10.

Disclosure(s): long UFS and IPSU at time of writing

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