Be Careful What you Short

 

When I’m going through a testing process to check for a new update, my go to screen is “Close > 444”. This seems all fine and well, and will return companies that have a close greater than 444, but, believe it or not, this usage of “close” is incorrect.

Within the Equities Lab system, there are two types of close – Close, and RawClose.

· Close is the split adjusted closing price

· RawClose is the unadjusted closing price.

This differentiation is important when you are looking at a static line using close as a parameter.

Does it make that big of a difference?

It depends on the screen. Let’s use the original example, Close > 444.

Here are the results. Included are some of the biggest names in each industry –  all of whom have a closing price greater than 444.

As someone who has seen this screen more times than I can count, I’m going to spoil the results for you, it goes down consistently losing most every penny. Because of this, we are going to run this screen as a short strategy and add two little tabs.

· Position_weights

  • This tab will add a weight to each position. You can add certain weights to different groups – say, giving technology a bigger weight in your portfolio than restaurants. Or, in this case, you can give every position in your portfolio a negative weight, essentially shorting the position

· Cash_weight

  • In order to effectively short anything, you need to add a cash_weight. This will adjust your portfolio to simulate that you have 2x the cash that was required to short sell the position to protect from downside. We can’t simulate what your brokerage would do in the event of a margin call. In order to account for the downside we use 2*number of matches.

 

Once that’s done, it’s time to backtest the “strategy”.

Fantastic! This screen performs so well that it’s almost tempting just to jump the gun and start shorting companies with exceedingly high closing prices. You’re making money in the recession and even beating the market consistently outside of that.

Sadly, these results are wrong. If you go out and short these companies using this strategy, you are basing your investments off of a false line of the Equihack language and your screener will fall apart.

How badly?

Well, badly enough that, at the end of the day, you’ve lost money by shorting companies with extremely high share prices. You still make a bunch of money in each of the most recent recession points, but you lose money every other year.

When can I use “Close”

Close is best used when an argument is more of an equation, like below.

 

This line is asking for the change of close, returning a percentage, over the past year, and compares that to the change of close 2 years ago, also returning a percentage. These two values are going to be pretty much the same whether you use Close or RawClose as it’s looking for a percentage of change rather than the exact value of close.

About Tyler McCain

A student of finance at Georgia State University, Tyler has had a passion for the world of finance for as long as he can remember. Joining the Equities Lab team in 2015 he attempts to juggle the perfect mix of school, work, and giving back to the community. When he isn't working at Equities Lab he can often be found helping teach programs at the Rosen Family Foundation - a non-profit that teaches financial literacy to middle and high school students.

1 Comment

  1. […] have experience shorting within the Equities Lab system, we have an article that utilizes the position weights feature more closely on our […]

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