Creating long short portfolios
May 27, 2020
February 14, 2022
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Sector Booting using SCTR

Can we boost performance by getting rid of a couple of bad industries? Certainly. Can we do it via the SCTR? Maybe.

The best case: what future prediction can bring

Before we get started, we want to understand what perfect prediction could bring us.

This chart is what would happen, from 2000, if we could magically throw out the bottom 20% of these 11 sectors (usually 3), in terms of future performance next quarter. Since we are fantasizing, we also don’t charge ourselves commissions, or have stop losses. That flatness at the end reflects the fact that we can’t actually predict the future, so when we run out of the past and present, the magic must stop. Zooming in on the chart, we see that we outperform bit by bit, but no year is too spectacular.

The worst case: future prediction gone awry

How much does it matter if we screw up? Is all the performance sprinkled evenly among the better sectors? Turns out not. From 2012, the performance of the bottom 80% of all sectors is uninspiring:

Working from 2000, the results are just ghastly.

Getting those high performing sectors is critical.

Enter the SCTR

The Stock Charts Technical Rank, or SCTR is a score that looks at a stock’s technical performance over various time periods. In this document we’d like to use it to filter out bad sectors, exactly as we did with our future predicting index.

While that’s not quite as impressive as the crystal ball, it still manages to outperform the S&P 500. That’s interesting, but how does it do against just buying all the sector ETF’s with equal weight?

That grey line (all the etfs), shows that we did nothing special. We didn’t manage to outperform or underperform. Humph. Trying to outlaw the top 20%, or both the top and bottom 20%, or the top and bottom 10% all yielded the same results: not much. We’ve spared you the joy of looking at a collection of almost identical charts.

Contrarian thinking for the win

One possibility we missed: only the bottom 20%. This is much more volatile than everything, but has much better performance, especially recently.

Zooming in on it makes it more obvious how bumpy and profitable the ride is.

The moral of the story: Don’t neglect your stock picks in out of favor sectors, because that’s where a lot of the outperformance is hiding.

Henry Crutcher is an avid family guy, board gamer (think Settlers of Catan, Puerto Rico, etc), computer nut, and all around geek. Hailing from Louisville, KY, he has noticed that the weather in Louisville is remarkably similar to the weather in Atlanta, GA despite the 407 miles that separate them. He has two daughters, one cat, and lots of trees. He loves the Miles Vorkosigan series from Lois McMaster Bujold, for its mix of SF, comedy and insight into how people work. He also comsumes more than his fair share of cheesy business/economics books, such as The Ascent of Money by Niall Ferguson, or Farewell to Alms, by Gregory Clark.

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