A Tactical Review Of The Team Alpha 2013 Model Portfolio

by: Bob Barnes

At the beginning of 2013 Team Alpha created a model portfolio based on growth and momentum projections for the next 12 months.

I previously reviewed progress of the portfolio after 90 days and now, at year's end, this seemed like a good time to take a look at how the various components performed for the year and how we might have improved on the portfolio returns using a simple momentum and relative strength filter.

To put the portfolio in a seeking alpha perspective the SPY ETF has been included in the mix to provide a performance benchmark.

The one year graphics look like this:

The year started out strong for the portfolio but sustained considerable whipsawing throughout the last 6 months of the year, making only a few percentage points gains. The model assumes that positions are held in equal dollar amounts and that no rebalancing occurs for the duration of the test.

The portfolio looks like it has good potential but would benefit from some money management controls to prevent substantial draw downs and to capitalize on those periods when the portfolio was showing strength.

There are various tactical tools that might be engaged to accomplish these goals and here's a simple lazy man strategy: just invest in the top ranked portfolio component for relative strength and momentum and rotate capital as needed when that ranking changes.

These are the performance metrics if capital is allocated only to the top ranked component:

The resultant one year performance chart looks a bit different than simply holding all the portfolio components concurrently.

The one stock tactic did demonstrate considerable drawdown for the last 5 months of the year and once again dramatically illustrates the value of strict stop loss and money management controls.

The charts here are shown with overlays of RSQ (linear regression line) and P6 (polynomial to the 6th degree) as examples of simple momentum indicators that might be used to establish a risk management plan.

The sequential momentum rankings for the closing weeks of 2013 show that top ranked positions can be sustained for some time and may not require daily or even weekly rebalancing in order to produce the best investment odds.

Alternate tactics for managing portfolio dynamics might include using a top 2, 3 or 4 sort to seek higher alpha returns and to aggressively rotate positions as momentum rises and falls in the focus issues.

This same tactic can be applied to a portfolio comprised of SPY and the SPYDR sector ETFs that effectively cover the market spectrum: XLB, XLE, XLF, XLI, XLK, XLP, XLU, XLV, XLY in order to detect and capitalize on the sectors that are outperforming at the moment.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.

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