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In our first article, we listed low cost exchange traded funds that could be utilized by the Market Map models during equity allocation periods, one of those ETF's being the Powershares QQQ Trust ETF (NASDAQ:QQQ). As we continue our search for alpha, in this article, we input data for a smaller cap stock universe into the Market Map model by utilizing the Nasdaq 100 index (NDX); the underlying proxy for the QQQ. Additionally, in order to achieve more robust testing, we also employ the Nasdaq Composite index from 1962 through 1987 (as the NDX historical price history starts in 1985).

Going forward, in order to avoid redundancy in presenting historical entry and exit data output from the Market Map models #1 and #2, we will only present the applicable statistics tables. Readers can reference the data for MMap models' historical entry and exit tables in the previous articles here and here*.

1962 - 2013 Statistics:

* Market Map model 2 uses allocation towards Long Bond ETF


Buy& Hold

Market Map model 2Market Map model 1
dividends excludeddividends excludeddividends excluded
Standard Deviation29.2%17.8%24%
Sharpe Ratio0.451.00.73
Nasdaq + BOND cum % during invest 1020%958%
Nasdaq cum % during cash 17.3%22%
# of tradesn/a6751
% of months BOND invested 1.60%n/a
Max Drawdown2000-20022007-20082007-2008
Worst month-29.9%-13.9%-13.9%
% positive months60%64%65%
$1 becomes$234$2,544$1,416

2000 - 2013 Statistics:

NDX 100 B&HMarket Map model 2Market Map model 1
dividends excludeddividends excludeddividends excluded
Standard Deviation31.0%22.0%22.2%
Sharpe Ratio0.070.820.72
NDX points captured-35732533417
NDX + BOND cum % during invest 284%197%
NDX cum % during cash -110%-84%
# of tradesn/a2121
% of months BOND invested 3.7%n/a
Max Drawdown2000-20022007-20082007-2008
Worst month-22.9%-11.5%-11.5%
% positive months55%67%68%
$1 becomes-$11.00$10.20$7.46

So far, predictably, smaller cap growth stocks provide the best compound returns using our model with Sharpe ratios equal to those using the S&P500, albeit with more volatility and slightly higher max drawdown.

In our next article, we will implement a Fama and French value portfolio into the Market Map model.

Disclosure: I am long QQQ. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.