S&C V32.1 pg36 Outperform the Market with Sector ETFs

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S&C V32.1 pg36 Outperform the Market with Sector ETFs

posted Mar 10, 2017

Papers Seasonal Trends ETFs Case Studies

I implemented the algorithm from Stocks and Commodities Magazine V32.1 page 36 by Todd and Steven Winkler.

Algorithm:
Select worst 3 performing ETF sectors at end of year as measured by Returns over last year
Hold them 1 year
Repeat

Modifications from paper:
If trading starts outside of last day of December buy lowest ranked
Rebalance portfolio on a daily basis because Quantopian doesn't have GTC orders
- It means that if orders aren't filled on day placed they are cancelled leaving an under positioned portfolio
- It keeps leverage at about 1 but it generates more trades (which QT includes commissions and slippage for)

There is also an option to re-rank on a monthly basis. This did not work as well in my backtesting.

I couldn't verify all the backtests from the paper because Quantopian only has historical data to about 2002. However the basic premise of the paper is confirmed and the backtest produces better returns than just holding SPY.

This algorithm however is not for the faint of heart because 50%+ drawdowns can occur.

Cheers,
John

5 responses

John ,

Interesting findings.
BTW
Calculation of returns over last year require not 252 but 253 data points.
So line 131 should be:

window_length=253,

Vladimir,

Thanks for the comment.

It is correct that I don't use exact number of trading days per year to compute Returns but over the period of the backtest the average trading days were 251.7 per year.

Do you have a reference on why 253 should be used?

Thanks,
John

John,

Rounded 251.7 is 252.
To calculate 1 day return you need today's price and yesterday's price .
To calculate 252 days return you need today's price and price 252 days ago.
Total bars in data window to calculate 252 days return should be 253.

Thanks.

Attached is cleaned up code with:
- Rebalance on leverage too high
- Separate ranking from trading (fixes exit position bug on large portfolios)
- Allow orders to fill for 15 days in January (large portfolio)
- Tries to avoid very small orders on rebalancing
- Returns with 253 day window

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The material on this website is provided for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation or endorsement for any security or strategy, nor does it constitute an offer to provide investment advisory services by Quantopian.

In addition, the material offers no opinion with respect to the suitability of any security or specific investment. No information contained herein should be regarded as a suggestion to engage in or refrain from any investment-related course of action as none of Quantopian nor any of its affiliates is undertaking to provide investment advice, act as an adviser to any plan or entity subject to the Employee Retirement Income Security Act of 1974, as amended, individual retirement account or individual retirement annuity, or give advice in a fiduciary capacity with respect to the materials presented herein. If you are an individual retirement or other investor, contact your financial advisor or other fiduciary unrelated to Quantopian about whether any given investment idea, strategy, product or service described herein may be appropriate for your circumstances. All investments involve risk, including loss of principal. Quantopian makes no guarantees as to the accuracy or completeness of the views expressed in the website. The views are subject to change, and may have become unreliable for various reasons, including changes in market conditions or economic circumstances.