Market Map Model 2: Using Nasdaq Composite And Nasdaq 100 Index

Nov. 8.13 | About: PowerShares QQQ (QQQ)

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

Nasdaq

Buy& Hold

Market Map model 2 Market Map model 1
dividends excluded dividends excluded dividends excluded
1962-2013 1962-2013 1962-2013
CAGR 11.5% 17.0% 15.6%
Average 13.1% 17.9% 17.1%
Standard Deviation 29.2% 17.8% 24%
Sharpe Ratio 0.45 1.0 0.73
Nasdaq + BOND cum % during invest 1020% 958%
Nasdaq cum % during cash 17.3% 22%
# of trades n/a 67 51
% of months BOND invested 1.60% n/a
Max Drawdown 2000-2002 2007-2008 2007-2008
-81% -18.5% -18.5%
Worst month -29.9% -13.9% -13.9%
% positive months 60% 64% 65%
$1 becomes $234 $2,544 $1,416
Click to enlarge
Click to enlarge

2000 - 2013 Statistics:

NDX 100 B&H Market Map model 2 Market Map model 1
dividends excluded dividends excluded dividends excluded
2000-2013 2000-2013 2000-2013
CAGR -0.70% 19.6% 15.1%
Average 2.0% 18.0% 15.9%
Standard Deviation 31.0% 22.0% 22.2%
Sharpe Ratio 0.07 0.82 0.72
NDX points captured -357 3253 3417
NDX + BOND cum % during invest 284% 197%
NDX cum % during cash -110% -84%
# of trades n/a 21 21
% of months BOND invested 3.7% n/a
Max Drawdown 2000-2002 2007-2008 2007-2008
-81% -18.5% -18.5%
Worst month -22.9% -11.5% -11.5%
% positive months 55% 67% 68%
$1 becomes -$11.00 $10.20 $7.46
Click to enlarge
Click to enlarge

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.