Five years ago I designed and managed a portfolio based on the technical criteria that I use to generate my daily Blue Plate Specials (see column on the right). It was a long/short equity only portfolio, meaning no funds, ETFs, futures, or options were allowed. It returned an uncompounded average of 40% for a year. I thought it would be interesting to reconstruct such a portfolio so that my readers could see how to use the information in the Blue Plate Specials for their own portfolio management.
My second goal is to find out how such a portfolio will do in the current market environment. Will I be able to return 40% this time?
Portfolio guidelines
My portfolio guidelines are as follows:
1. A bull market is defined as when the S&P 500 index is above its 40 day (exponential) moving average; a bear market is when it is below it.
2. Every day during a bull market, 10 stocks will be selected as long plays. These longs will be selected from the following lists:
* Breaking out to new highs (on higher than normal volume)
* Breaking out to new highs on lower (than normal) volume
* Breaking out (on higher than normal volume)
* Breaking out on lower (than normal) volume
* Low-priced leaders
* Speculative leaders
* Darlings of the Day
3. Of these long picks, at most only 3 can be chosen from the Speculative list. (This is to limit portfolio risk.)
4. During a bull market, no stocks will be shorted.
5. Each portfolio will be automatically closed out at the end of 11 trading days. Individual stocks will be closed before that date if they trade through their stop/losses. Stop/losses will be entered at the time of purchase and will be based either on support levels or if there are no appropriate or apparent support levels, a percentage value will be used based on their average true range (ATR).
6. Stocks will be selected based on technicals only, although if a major upcoming fundamental event has the potential to adversely affect near-term value, that will be taken into account (for example, a highly anticipated earnings release which, if not met, would send the stock plummeting).
7. During a bear market, the long portfolio will be closed and a short portfolio initiated. Up to 5 short positions will be selected from the following lists:
* Breaking down to new lows
* Breaking down
8. Only stocks over $5 will be shorted.
9. During a bear market, no long positions will be held.
[Important Note: For those of you who are not comfortable taking short positions, just stay in cash or cash equivalents (money markets, etc.) during bear market periods. ]
10. The management of bear market portfolios will be the same as in the bull market case except with a more vigilant eye as to maintaining stop/losses. If the market moves violently against a position, it will be immediately closed out to prevent further loss. (The short side is trickier to manage than the long side because of increased volatility.)
11. All positions will be equal dollar weighted which I think is the least risky approach. To minimize risk even further, I’ll be taking half positions on the short side unless volatility rises above 30 where I’ll then put on full positions.
12. No commissions or trading fees will be used in the calculations as the impact of these has differing effects based on the total value of the portfolio and on the actual commission costs.
Other criteria
For management purposes, I’ll be starting out with $1000 per long position. This gives a starting value of $10,000 per portfolio per day. Since at most 11 portfolios will be managed at any given time, that means that the total starting value will be $110,000.
Buy prices will reflect the price at the time of placing the trade. Note that right now this is a virtual portfolio but every effort will be made to simulate actual trading conditions. Market orders will be used except in the rare case of those (usually) speculative stocks with low trading volumes where limited orders will be put on. In this case, a virtual trading platform will be used to simulate the actual trade. (I’ve used this before and it works very well. When a real trade of similar size gets executed at the limit price, the virtual trade is also executed.)
The total portfolio will be rebalanced on or near the 15th of each month. If there’s a net gain over the previous month, then the extra monies will be equally distributed to the subsequent daily portfolios. For example, if a profit of $11,000 is realized the first month, then the total value of the daily portfolios will be $11000 giving each position an initial value of $1100. Similarly, if there’s a loss incurred, the position values will be downsized accordingly.
Portfolios will be published here daily and a running log of total portfolio returns will be kept. I’ll need to create a new spot on the website for these features, but for right now the daily portfolio will be published here in the blog section.
Here are today’s long picks (the last three in blue are the more speculative stocks):
