Marc Cohn's  Instablog

Marc Cohn
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I am a patent litigator with a background in physics and electronics. I enjoy studying quantitative, rules-based investment methods through rigorous backtesting and numerical analysis. I believe that patterns exist in the market that benefit trading -- the challenge is finding them!
  • Follow-Up On Ultra-Simple Slope Strategy; Sharpe Of 1.45 With 34.5% CAGR 1 comment
    Feb 6, 2014 8:23 PM | about stocks: MDY, SHY, EDV, EEM, EPP, SSO, ILF

    This is a followup to my previous Instablog about the Ultra-Simple Slope technique.

    The 3-day technique gave a CAGR of 37.1% from 2004 to 2013, with a standard deviation of 28%, a Sharpe of 1.32 and a max drawdown over almost 30%. I wondered if this could be improved upon.

    The 3-day technique invests in the worst-performing ETF over the past three days. I wondered if we selected the ETF that was least correlated with the BEST performing ETF, whether the results would be the same.

    Indeed, the inverse correlation technique provided good gains, with CAGR of 30% since 2004 when an 8-day correlation was used.

    I thought to combine the two systems to reduce volatility. Initially, I tried the following in which I would buy two positions each trading day: (1) the worst-performing ETF over the last 3 days and (2) the ETF with the least correlation to the best performing ETF over the last three days. This system provided better returns with reduced volatility.

    I optimized these parameters for the period 2004-2013 and found that the performance was further improved by using the ETF with the least correlation to the second-best ETF over the last three days.

    Thus, the system is: (1) buy 1/2 position in best 3-day ETF and (2) buy 1/2 position in ETF that is least correlated to the second-best 3-day ETF (using an 8 day correlation).

    The result is CAGR of 34.5% and a remarkable Sharpe ratio of 1.45, showing the substantial reduction in volatility (stdev now only 23%) with minimal reduction in returns. Max drawdown is about the same at 30%.

    Below is performance vs MDY:

    2004 6.88% 14.31%
    2005 29.20% 15.41%
    2006 40.88% 8.60%
    2007 42.47% 2.13%
    2008 60.72% -31.60%
    2009 58.25% 35.45%
    2010 50.92% 23.83%
    2011 26.84% -1.52%
    2012 18.58% 20.49%
    2013 11.99% 28.35%

    Disclosure: I am long SSO.

    Stocks: MDY, SHY, EDV, EEM, EPP, SSO, ILF
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  • Raj2020
    , contributor
    Comments (171) | Send Message
    Marc - I'm new to these models so bear with me. I read through all your instalbogs and articles and have some questions on this and the previous post.


    "I use ETF's similar to those from Grossman's GMR: MDY, FEZ, EEM, ILF, EPP, TLT, and SHY.". - Are you using the same set of ETFs or are you using something else? (since you use the word 'similar').


    - What's the layman interpretation of the "lowest slope"?


    - I'm assuming you monitor the data on a daily basis - correct?


    27 Feb 2014, 09:44 PM Reply Like
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