Project Description
- The NASDAQ Meta strategy uses adjusted momentum to blend the top four NASDAQ 100 stocks.
- It switches between an aggressive higher volatility sub-strategy and a low volatility stock selection formula, based upon the market environment.
- Variable allocation to Treasuries smooths the equity curve and provide crash protection.
- The testing of the last 10 year years shows this strategy is significantly outperform, with a CAGR of 40% and a Sharpe of 1.4, almost three times the S&P 500.
Read more details in the post here.
The stock rotation strategy uses the dynamic stock rotation formula of our proprietary Max Sharpe engine. For this model it is tuned to capture momentum between individual stocks. Additionally, we are using two independent strategy models – a high and a low volatility one.
Each month our model chooses which model is appropriate, based on recent market behaviour. Then that sub-model is used to pick the stocks in nasdaq 100 that work best in that environment.
The model allocates between 0 to 30% of funds to TMF, the 3x treasuriy ETF, to protect from downside risk.
We use the Nasdaq 100 Index as a basis for our pool of individual nasdaq 100 stocks. This index often captures the most dynamic names in the large cap U.S-equity market, and provides a solid pool of strong growth stocks when you invest in nasdaq. Our two sub-models use the MaxSharpe engine to select a blend of four stocks. The Meta Model switches between the aggressive growth vs low volatility sub-models, significantly improving performance by avoiding much of the pull backs that aggressive growth has in certain market shifts.
The model choices four individual stocks from the Nasdaq 100 stock index. So depending on what stocks are in the nasdaq 100, the stock rotation formula might include the new ones.
Additionally, the model may allocate some funds to TMF Direxion 3x leveraged 20-yr Treasury. This helps mitigate risk during certain market environments.
Risk and Performance Profile
| 3 Months | 12 Months | Since Inception | |
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| CAGR | |||
| Volatility | |||
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| Sharpe |
The Nasdaq 100 stock rotation strategy is a good fit for investors that want to intelligently invest in Nasdaq as well as for stock-pickers looking for a rules-based stock selection strategy. The Nasdaq strategy can also complement our existing strategies and can work well with our more conservative strategies like BRS (bond rotation), the BUG or with non-U.S. equity strategies like World Top 4.
Summary of the Nasdaq 100 stock rotation strategy
- Intelligent Algorithms run two prallel sub-strategies employing Nasdaq 100 stocks.
- Meta-layer chooses between the two sub-strategies based on current market conditions.
- Variable allocation to Treasuries provides protection from large drawdowns.
Key Principles of the Nasdaq 100 strategy
Financial asset momentum is a well-documented and academically proven occurrence. It reveals itself in assets that have strong absolute performance and/or relative out performance vs peers. What is exciting is that momentum, when properly measured, tends to continue for the next time period. Hence, momentum assets have a nice “edge” in future performance vs other assets.
We have been exploiting asset class and sector momentum; however individual stock momentum tends to be an even stronger force, particularly in the top NASDAQ 100 stocks. We have found a way to effectively capture and tame the tiger that are the hottest trading Nasdaq stocks.
During bull market phases, and especially “risk on” periods, the strongest NASDAQ stocks blow everything else away. However, they can “get ahead of themselves”, and their high volatility makes them vulnerable during phases when the overall market is in a “risk on” mode.
Can you invest in Nasdaq-100 stocks without risking big drawdowns? Yes!
To manage those challenges, we implemented several exciting methodology improvements.
- Mean Reversion: One of the things that scares a lot of investors is buying stocks after they have run up a lot. Momentum is based on this principle of buying high and selling higher, however stocks that rise in a short sudden burst may, in the short term, correct. We have found that we can improve results by adjusting for the most recent period movements. If a stock rises too much or too fast, we account for mean reversion by penalizing such short term behavior.
- Protection: We allow the model to allocate a part of the portfolio to Treasuries to balance out the supercharged Nasdaq momentum stocks. This effectively smooths out the equity and improves risk adjusted returns by moderating strategy drawdowns. It also allows the model to allocate more to Treasuries, if the Nasdaq index, as a whole, exhibits momentum weakness.
- Intelligent Ranking: Our improved MaxSharpe engine ensures we get the right blend of stocks that work well together and have an allocation to each individual stock that reflects their volatility and the optimal blend with other stocks.
Compact Meta Strategy for selecting the top stocks in Nasdaq-100 index
Nasdaq momentum goes through two very different regimes . . . pure risk on aggressive growth, and more constrained/flat/choppy periods. High volatility stocks work in the high growth periods while lower volatility momentum stocks work better in constrained periods
When you invest in Nasdaq stocks, no one model could optimally handle this switching, so we built two models – a high volatility and low volatility model. Rather than put the burden on subscribers to switch between these models, we created a Meta-Strategy to switch between the high vs low volatility models. These works really well, as the market regime tends to stay in the same state for a number of months at a time.
So each month the Nasdaq stock selection strategy chooses between the two alternative configurations – and it picks four stocks from that chosen model.
Stress Testing Results for the stock selection strategy
Early this year we built this strategy, and we wanted to give it time to feel comfortable that it would hold up in a variety of conditions. Well, the August/Sept nasty correction have given us confidence that his approach can withstand the market stress quite well. NASDAQ is our strongest potential growth strategy.
Over the last ten years, here is the backtest model performance vs benchmarks.
You can see how normally the high volatility is the strong stock selection, but it does not always work, hence the higher drawdown. The Meta layer helps by switching between them based on which has been working better.
How to read the table:
- NASDAQ Meta: This is the portfolio level meta-strategy – the net results of the model, as the model switches between the high vs low volatility sub-models. Note that subscribers would track against these results.
- NASDAQ 100 (hv): The high volatility momentum sub-strategy.
- NASDAQ 100 (lv): The low volatility momentum sub-strategy.
- SPY & TLT: Benchmarks performance for the S&P500 and long term US Treasury bonds.
Metrics are pretty standard
- CAGR: Compounded Annual Growth Rate
- Sharpe: https://en.wikipedia.org/wiki/Sharpe_ratio, using 0% risk free rate.
- Volatility: Degree of variation of a trading price series over time.
- Max Drawdown: Peak to trough maximum decline; note – this is less insightful than other measures, as it is a signal point.
Read more details in the post about our asset allocation in the Nasdaq-100 index..