The Trading Almanac

A diary of investments in my IRA, a daily look at my stock watch list, and additional commentary/discussions on individual stocks, the overall market, economics, technology, etc.

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Monday, January 16, 2006

Hindsight Report Performance Review

As promised last week I have began a rudimentary tracking system of my Hindsight Report lists that I put out after every trading day. The purpose is to see how well these stocks perform following them grabbing my attention enough to be posted on this blog. Almost all of my trades will come from stocks having appeared recently in the hindsight report.

Here is the first summary for the performance of each and every stock to appear on the hindsight reports since January 3rd:

If I had bought the stocks on the open of the day after them appearing on the Hindsight Reports and sold them on the close of that day, each trade would be up an average of 0.58%. The CAGR (Compounded Annual Growth Rate) is astounding; over 725%. Basically, in a hypothetical situation, if I started the year with $1,000, purchased an equal weighting of each stock in the hindsight report at the opening price of the day after it appears, sold all of my positions at the closing price of that same day, and then reinvested 100% of in assets in the same manner in the next day's list, that would hypothetically go to $8,255 by the end of the year. Good Stuff, Maynard.

Now, I must take into account fees and commissions and of course slippage. Slippage is the difference between the price you actually receive compared to your target price in a transaction. In this case the target prices are the open and close of the day after a stock appears on the list. Commissions and slippage can be a huge drain on your trading returns...

If I extend the analysis out to one week (invest in the list on the open the day after the list is released and then hold for one week, selling at the closing price), the average return is 2.64%. Compounded for a year, that would be 288%. Not too bad either, and somewhat easier to manage.

Conclusion: So far, I am pleased with the results of my study. I want to further break it down by looking at the maximum drawdowns in the 1 day and 1 week holding periods and see if returns can be increased and/or risk decreased by using a pre-set stop. I can go really nerdy, and do some deeper statistical analysis too. I want to compare my hypothetical returns to those of the market indices to gain perspective and to measure my alpha. Also, the stock market has been HOTT this year. I want to see how these momentum stocks perform when the market is in full correction mode before I truly would trust my hindsight report list as an actual investment vehicle. Just last Wednesday, the Hindsight Report list was down 1.1% the following day.

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