Weighing In with the Industry Breakout Trading System
Tuesday, January 27, 2009 at 1:22PM 
I want to get back to my original concepts of industry strength (see Switching Horses) so I am going to put my Industry Breakout aside for now and watch it's out of sample performance. I'm reasonably satisfied with the trading system but it is always a good idea to summarize the strengths and weaknesses of the system for future reference. For system trading rules see Second Thoughts.
Weighing in with Industry Breakout
The first note I have to make to myself is that it is not really an industry breakout system. Most of the performance has to do with the ranking system Olikea's Brainchild plus market timing. There is an industry breakout rule but it only plays a minor role in reduction of drawdown. See Checking Under the Hood. So I should change the name but will do so later. (Too much work to accomplish, too little time.)
I am reasonably happy with the system robustness and startup robustness. Ranking system robustness and ranking system across different universes appears to be good. I also tested the ranking system against various sectors and the results were relatively good.
The profit per trade in backtest was approximately 14%. This is fairly good and should stand up to moderate changes in market conditions.
What do I view as
negatives
for this system?
The drawdown is protected by market timing. If the
market timing
is even slightly off the drawdown could end up being
20%-30%. See
System
Degradation
Testing.
I expect much more volatility going forward than we have seen in the years leading up to the late 2007 bear market. Therefore the market timing will probably play a more significant role going forward, resulting in more exit/entries, whipsaw and low profit per trade. There is nothing I can stand worse than having to put in sell orders for 20 stocks on a Monday morning and trying to manage the trades.
Some time ago I created a port that had slightly different buy/sell rules. I have been monitoring this system over time - uses the same ranking system. It can be found here. Although the port is beating the benchmark there is a disturbing phenomenon going on. There have been three days since startup where the 20 stock port has had 5% losses.
| Date | Industry Breakout Variant |
SP500 Benchmark |
| 12/19/2008 | -1.52% | -1.83% |
| 12/22/2008 | 0.75% | -0.97% |
| 12/23/2008 | -0.39% | 0.58% |
| 12/24/2008 | 1.91% | 0.54% |
| 12/26/2008 | -1.62% | -0.39% |
| 12/29/2008 | 2.91% | 2.44% |
| 12/30/2008 | 3.93% | 1.42% |
| 12/31/2008 | 0.51% | 3.16% |
| 01/02/2009 | 0.63% | -0.47% |
| 01/05/2009 | 1.26% | 0.78% |
| 01/06/2009 | -1.01% | -3.00% |
| 01/07/2009 | 2.31% | 0.34% |
| 01/08/2009 | -5.08% | -2.13% |
| 01/09/2009 | -1.30% | -2.26% |
| 01/12/2009 | 1.64% | 0.18% |
| 01/13/2009 | -4.95% | -3.35% |
| 01/14/2009 | 1.71% | 0.13% |
| 01/15/2009 | 0.91% | 0.76% |
| 01/16/2009 | -5.68% | -5.28% |
| 01/20/2009 | 4.12% | 4.35% |
| 01/21/2009 | -2.27% | -1.52% |
| 01/22/2009 | 0.31% | 0.54% |
| 01/23/2009 | 2.18% | 0.56% |
This is something I don't like to see in a relatively diversified portfolio. It might be a warning of a breakdown in the ranking system. I'm not sure. Anyways I'm going to watch this carefully.
You can find the Industry Breakout stock trading system at Portfolio123 as follows:
Industry Breakout Portfolio: http://www.portfolio123.com/port_summary.jsp?portid=406596
Ranking System: http://www.portfolio123.com/app/ranking-system/72662
Custom Universe: http://www.portfolio123.com/screen_summary.jsp?mt=7&screenid=20173
Now back to my research on Industry Strength!
Steve, the Stock Market Student
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