Denny’s DM model sold the BASI on March 20, 2017 for 13 pct loss when stock was in negative momentum.
Yuval is excited about holding BASI for 50 more days from March 20, 2017.
Positive momentum on Denny’s DM model
04/10/17 5D 1Y BWEN 48 $7.98 46.53%
in last couple of weeks, BWEN is down more than 30%
Advanced Member
Re: 20 Stocks Micro & Small 6X TurnOver
Why should there be a minimum market cap? Market cap has nothing to do with liquidity. A lot of stocks that are great turnaround buys will have really low market caps while maintaining high liquidity. I can’t see any reason to exclude stocks with a low market cap–that’s where a lot of the real bargains are. I’m really excited about BASI right now, for instance. Its liquidity is fine, but its market cap is only $11.6 million, and it was a lot lower when I first bought it in February.
invest(igations) YuvalTaylor
AAII experts says have watchlist to enter on start of the momentum and exit at end of the momentum.
I bought a large number of shares of BASI on February 23 for $1.17. I’m up 33% on those shares. I kept buying more shares even though the price went up. BASI now comprises 6% of my portfolio.
I don’t know enough about Denny’s DM model to understand why he would have sold BASI on March 20. If it was indeed because it was in “negative momentum,” he must have used a rather unusual measure of momentum. Its price on March 20 was $1.50. That was higher than any price BASI had sold at between February 2016 and late February 2017. The only time BASI was higher than $1.50 in recent memory was just for about two weeks in late February and early March. So I don’t know where the “negative momentum” could have come in. Surely he couldn’t have advised selling a stock just because its price had fallen in two weeks. I’m assuming there was another reason.
I’m not “excited” to hold BASI for fifty more days. On Monday they’re releasing their Q2 results. That could change everything.
As for BWEN, I bought it in January and sold at the end of April. I made 125% on that trade.
There was a recent paper (2016 Mar) which argues that inverse market cap weighting achieves superior returns. The paper’s authors celebrate how they “are the first to discover this phenomenon.” We know that weighting towards smaller caps will do better, so I’m not sure why they are surprised.
Yet, the convergence of a special case of Tukey’s ladder with findings within the field of “stochastic portfolio theory” is somewhat striking. In another recent paper (2016 Mar), the authors use high-level math to demonstrate how it might be possible to solve for security weights that probabilistically beat the market’s rate of return given only that securities are risk-neutral martingales – i.e., we assume all stocks have the same rates of return, but different volatilities. Since it is assumed size is related to volatility, the solution weights are also inversely related to size.
Moreover, this finding conforms to a special case of continuous Kelly betting in which securities are treated also as continuous semi-martingales – Ed Thorp is an editor of the foremost compendium on the “Kelly Capital Growth Criteria”. A key finding of continuous Kelly is that – in the absence of fees – rebalancing should be done as frequently as possible.
All of this seems interesting, but then I am reminded that smaller cap stocks and higher volatility stock incur greater costs. Are inverse weightings a free lunch? Or is a free lunch averted through rationally explained costs and risk premia?
David,
The last paper that you sited uses the term that I have come to use for this: “…volatility-harvesting strategies.”
A back of the envelope calculation leads me to believe that this may be giving me an additional 1% per month in some of my ports. However, this calculation assumes a lack of correlation between stocks in my portfolio. So, it is probably giving me less than this in my ports. Still this is not trivial.
I have on my to-do-list the idea of seeing how I could combine an uncorrelated port or ETF with something very volatile like XIV.
XIV is attractive for this because it benefits from “roll yield.” It is also liquid. Also, with regard to slippage, you only have to rebalance back to equal weights.
Levered ETFs are likely to have problems with “volatility drag” and I am guessing this drag will be greater than any “volatility harvesting” I can do. This could be mitigated by closing-out daily but that would be a lot of slippage and commissions. I do not plan to look at this in any detail. XIV seems like the most realistic possibility—among the ideas I have considered on this.
Just a few random ideas about this very interesting topic.
-Jim
EDIT: Please ignore the images below. This was a first attempt to look at volatility harvesting with XIV. So far I cannot recommend it.
VXX and XIV are strange beasts, but a simple exposure to them sort of works for volatility harvesting purposes.
The main problem with XIV is that compared to a plain equity exposure is heavily leveraged, so you might want to adjust risk with some cash/bond exposure to get a decent Sharpe ratio.
Same idea applies to VXX, a naked 100% short on that could wipe your investment out or at least inflict a painful deleverage at the wrong time.
It’s also an hard to borrow security, so better be careful with a short.
A nice way to trade volatility harvesting is to buy medium-long term put options on VXX (you can usually find good deals if you scan the volatility surface), and I think it can be done also on SEP-IRA accounts.
Momentum in firm fundamentals, i.e., earnings momentum, explains the performance of strategies based on price momentum. http://www.nber.org/papers/w20984
