The Short-Term Relative Strength-Strong Report with Market Timing

For the background on using the Relative Strength Strong reports, see the Long-Term study of that report, then come back and read this.

What we wanted to know

After seeing David Vomund's article and our Long-Term study, a friend suggested that the use of the Short-Term part of the Relative Strength report might be more appropriate to use since the AIQ market timing produces one round-trip trade about every two months. Sounded good to us, so we ran a backtest on it..

What we did

We started the study with the market buy signal that occurred on 11/09/88, using the stocks from the S&P 500. The makeup of the S&P 500 that we used was current as of 03/01/97; however, the S&P 500 of 01/20/88, and times in between, certainly had some different components .Using Dial/Data market data, there are 44 periods when the AIQ market signal had us in the market between 11/09/88 and 01/06/97.

What we found

This graph shows our findings most clearly. Note that the horizontal axis is not to scale.

Specifically we found::

• Buying only the top stock from the Short-Term Relative Strength-Strong report averaged 45.5% per year compounded for the 8+ years studied.
• Buying the top 2 stocks from the Short-Term Relative Strength-Strong report gave a slightly better return, averaging 47.3% per year compounded for the 8+ years studied.
• Buying the top 3 stocks from the Short-Term Relative Strength-Strong report gave a noticeably lower return, averaging 42.3% per year compounded for the 8+ years studied.
• The S&P 500 index, using a Buy and Hold strategy, averaged 13.1% per year.

What does this mean to you?

This is not a recommendation to use this system for trading or to make any specific investments. It is only a study of simulated returns on historical data. One conclusion that you should NOT draw is that the second ranking stock performed better on the average than the top ranking stock. That is not true. An investigation showed that the second ranking stock returned slightly less (44.8%) than the top ranked stock (45.5%). The improvement in the overall return when trading the top two stocks (instead of just the top one) is a result in spreading the risk between two issues whose price movements are at least somewhat uncorrelated.

Now what?

We did a control study of sorts on the Long-Term report. If you haven't already, you should take a look at that, too. And many results from each of the Relative Strength studies appear in a summary.

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