How Good is Industry Strength?

In the last post I determined that I could achieve a small advantage by focusing on industries that are on the rise.  Today I am going to take this line of thought a bit further and do some characterization of industry strength.

I ended the last post with the graph shown below.  As can be seen from the graph there is generally a modest weekly average stock price increase for stocks residing in industries that have risen over the last 60-300 trading days.  Stocks within a falling industry tend to fall in price over the subsequent week.

I always try to test both the positive and negative (or inverse) scenario.  When  both give consistent results then there is an additional level of comfort that I haven't made an error.

Now I am going to take this one step further and consider the strength of the industry rise in addition to direction.  To accomplish this I will run the same screener backtest with the same dates as before but the screener formula will be something like this:

FMedian("Close(0)/Close(n)",#Industry) > X

 where X is 1.1, 1.2, ... , 1.4

In other words I am going to adjust the threshold for the industry rise and test over a range of threshold values from 1.1 to 1.4.  The following screen shot shows the the screener setup.  The two variables (n:  Loopback Period;  X:  Threshold) are circled in red.

As before the backtester starts with $100 capital and re-invests each week into all stocks in the industries that satisfy the rules.  The results of all the runs were compiled and displayed in an EXCEL chart as shown below:

The results are much better when examining the industry strength.  There are also some interesting characteristics of this graph that should be investigated further.  The most obvious is the sweet spot at 160 day lookback period.  Let's have a look at the equity curve for n = 160 and X = 1.3.

That's all for now.  Next post I will analyze the sweet spot to see if I can find anything obvious that could be causing it.

Comments

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