Sector Selection / IWM comparison: new Robot call 8/24/2011

[Timothy Clontz]

Since the new Robot and stops have been initiated, Billy has been kind enough to update his algorithm pivots for the sector rotation test.

The previous test seemed to indicate positive synergy with the Robot, but with the new Robot and new stop calculations I'll begin this test as an entirely separate test.

Based on Billy's pivots and my sector selection, then, I've entered a new limit order this morning for:

XLK, buy at 23.10, with a stop set at 21.63.

[Timothy Clontz]

XLK did not hit its entry price.

New order is:

Buy XLK at 23.72, with stop at 22.36.

[Timothy Clontz]

XLK hit its entry price at 23.72 on 08/25/2011.

Current stop is 22.36.

A hypothetical new position would be:

Buy XLK at 23.10, with stop at 21.78.

[Timothy Clontz]

XLK hit its entry price at 23.72 on 08/25/2011.

Current stop is 22.36.

A hypothetical new position would be:

Buy XLK at 23.72, with stop at 22.28.

[Timothy Clontz]

XLK hit its entry price at 23.72 on 08/25/2011.

Current stop is 23.09.

A hypothetical new position would be:

None (per the IWM signal).

[Timothy Clontz]

Now that the new Robot is online and the backtest trade history is available, Billy was kind enough to encourage Pascal to spend ALL DAY LONG analyzing my own backtest sector calls for a compatibility check.

Many many thanks to both of them.

As it stands, the current settings on my sector rotation model are not compatible with the IWM Robot.

I suspected my short selections could underperform the Robot (since my model was primarily designed to be long-only), but the long selections underperformed as well.

At first I thought it had to do with the holding period. My model is designed to hold a trade for months at a time, potentially up to a year. The Robot holds long trades for an average of 23 days and short trades for an average of 14 days.

I ran a test of my own model showing returns of all long selections for a period of 23 days at a time (rather than one day at a time). My long sector selection vastly outperformed all other sectors when using 23 day running returns going back to 2003.

And yet it did not work on the specific days that the Robot made a long signal.

That is, my model selections outperform on the total of 23 day holding periods, and yet still underperforms the IWM Robot.

Billy and I had also speculated earlier that the higher Beta of IWM could outperform my selected sectors because of large cap sluggishness in the ETFs I use, but that also did not seem to be the case. There is something about the specific time triggers of the Robot that (almost perversely) seek out the underperforming periods of my sector selections. Pascal also ran a series of random sector selections and 6 out of 8 random sector selections outperformed my own model's chosen sector for the specific time periods of a Robot's long call.

That is, my selected sector was almost the worst performing sector during the specific Robot timing calls -- much worse than a random selection.

This is a most peculiar and fascinating discrepancy, but also an expensive one. Until I can get to the root of this, I will stop testing with live money once this current market call terminates.

Another perverse factor that I noted is that my sector selections outperformed the Robot when it had a problem with its own signal. In other words, when the Robot works my sector doesn't, and when my sector worked the Robot didn't.

Since they've upgraded the Robot I do not expect that peculiarity to continue.

As it stands I have some puzzles to piece together, and will not resume these tests live in the Algo forum until I can determine the specific causes of the negative synergy between the two models.

The Mousetrap model will continue to trade, however, since it is unrelated to the Robot signals and appears to be beating the S&P within the target range (i.e. S&P +30%).

Tim