Good timing or good selection--either will produce above-average results, as we shall see. And using both together can produce extraordinarily good results.

Selection
Selection first because it's easier to do. The prescribed condition I apply to a group of stocks is to measure their individual performances--how much they have gained or lost--over a specified period. I have researched virtually all periods from a few minutes to several years. For the present test, I found that a period of six months best suited my goal of infrequent transactions and weekly maintenance instead of daily.

First, I smoothed the weekly prices into moving averages. This gave me trends for all the stocks. These would be less erratic and jumpy than the stock prices themselves. Then I ranked the trends from best to worst and assigned a rank to each. I did this for all the weeks in an 18-year period. 945 weeks. It was an easy matter to select a variety of combinations of ranks or sequences of ranks that produced the best test results over the period.

By staying 'invested' in the top 3 ranked stocks continuosly, the total return was two and a half times greater than simply holding the S&P500--a 890% gain vs. a 350% gain.

This 'prescribed condition' was worth keeping and testing with a different set of stocks against the next time period, the two and a half years ending October 15th, 2004. During that time, the Dow Jones had a total loss of -4.7%, the S&P lost -1.4%, and the NASDQ-100 managed a gain of 3.9%. */ The top 3 ranked stocks gained 29.9%. When I changed to selection of the top 2 ranked stocks, the performance climbed to +31.1%.

Why two and a half years? The earliest available date for some of the components in the fund group.

Trends
Now let's look at the second prescribed condition, timing. I used the same moving averages of prices that I used above for selection and applied a short-term and long-term factor so that now I had two data sets for all the stocks. One was the shorter-term trend. The other, longer.

It was easy then to calculate what percent of stocks' current prices were above their trends, short-term and long term. And then compare the percent that were above their short-term trends with the percent that were above their long-term. Whenever the short-term percentage became greater or lesser than the long-term percentage, a change in trend was indicated which a trader or investor could act on.

Another consideration was what stocks to use. Was there a better group than the test portfolio of 36 'Classic' stocks, mostly blue chips? If we got good timing results with them, was there a more volatile group we could use that had bigger price swings for greater profits and possessed sufficient liquidity for easy buying and selling?

Exchange-traded funds filled the bill perfectly. There's lots of information on them available on the internet so I won't go into detail here. They are like mutual funds but trade like stocks, and the internal management expenses are far cheaper than those of mutual funds. And they have many advantages over individual stocks and mutual funds.

From the more than 160 ETFS available, I picked 17 that provide the best mix of volalitity and liquidity at this time. One choice, OEX, is not a tradeable stock but an index for the S&P100 Index. I include it here because it provides additional stabilizing balance to the portfolio and is tradeable in the form of options.

The next section shows additional alternative applications and their results.

______________________

* I have measured the performance of these indexes by their index funds which are equivalent and trade just like stocks. They are DIA, SPY, and QQQQ respectively.

HOME | ALTERNATIVE APPLICATIONS >