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Putting Piotroski to the Test
May 26, 2022Undefined Property Handling
September 16, 2022Two bad days in a row seem to be bad news… at least when rebalanced quarterly, or bi-monthly. Here we also limit it to stocks with a market cap over $1 billion, so that the large number of smaller stocks don’t bias the results.
Backtest Report for Jul 16, 2000 to Jul 16, 2021 for Two Bad Days In a Row
This normal screen rebalances quarterly. It (vividly) explores what happens to stocks that lose more than 4% on two consecutive days.
Model
There are several ways to create the model:
- Type it all in – “change close 1 < -4 and (change close 1) as of 1 < -4 and marketcap > 1b”. The first two terms get grouped together, while the market cap term is alone, but the meaning is the same.
- Build it up – Type the “and” first, then add a term, so that the and term has three empty boxes. After that fill each one in, typing change for the first two, and “mc > 1b” for the third. Fill in the two boxes with close and 1 day each, and stare at the identical first lines. Realize you forgot to offset the second one by one day, and type “as of” in the second change, replacing the text, and hit return. Fill in the new box with a 1 and put the -4 on each of the two boxes at the end.
- Try something completely different – use “(maximum_within (change close 1) 2) < -4” as a replacement for the first two lines. Same meaning, but less text. And testing 5 days is much easier with this formulation.
Why this model? Stocks rarely fall on their face multiple days in a row, and we’re capturing those that do, and figuring out what, if anything, such a faceplant means.
Visualizations
This does not look like a great chart! This made negative money over the 20 year span, with few deviations.
Eleven of the past twelve years showed this screen going down. This is bad enough, but it didn’t do that well in most of its up years, outperforming the S&P 500 in only six years.
Two down days in a row gives us stocks that are not strongly correlated with the market – at least the average week is weekly correlated with the market. Of course, since that is because this screen spends more time going down than up, that is not a good thing.
Return Summary
Table 1 This table show us numerically how volatile and disappointing these results would be. The screen manages to bounce around, making it unshortable, and still produce an 83% loss. Its negative 16% alpha makes sense as it is as volatile as the stock market – just in the wrong direction. |
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Monthly Returns
Table 2 This table shows how often it outperforms (not often), how much you’d lose if you had a 5% month (about a quarter of the portfolio), the standard deviation of the months vs the index (more than double), and more. This screen manages to make nothing on its median month! |
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Positions Only includes positions that were active anytime between Jul 16, 2000 to Jul 16, 2021
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* Returns are yield adjusted
The positions table (above) tells us that the average position made money, despite the portfolio being a loss making machine. This is probably because when the market crashed, this screen triggered with more positions at a time. The market also does really well after market crashes, meaning that all of those positions did well. I would be less convinced of this as a diagnostic flag during down markets, as a result.
The Takeaway
Avoid stocks that have two bad days in a row, except if there are too many of them at the same time. In doing so, you’ll avoid a messy, volatile ride to a loss.
