Stocks on the Move Summary

Stocks on the Move Summary

July 23, 2018 0 By Jeremy


Rules-Based Strategy Summary: Stocks on the Move

Stocks on the Move is one of the few stock based strategies I follow on Robotic Investing.  Most of the strategies you can follow along with on the site use ETFs as the asset choice.

This strategy is based off the book by Andreas Clenow called, “Stocks on the Move: Beating the Market with Hedge Fund Momentum Strategies“.  I have been watching this strategy for awhile now and have talked about it on a previous version of this site.  This time I am going to be simply describing how I am applying it to a hypothetical “real-world” portfolio for the site.

One thing to note is that this system is a lot more involved than something like the Global Value Strategy or the U.S. Sector Rotation strategy.  The system requires some calculation of statistical values that can be overwhelming to someone with out a good math background.

However, Clenow is really good at explaining the concepts and how to get to the number yourself.  This is one book that is a must-read to apply the concepts and do it right.  That said, if you want to see the stock rankings and not do the calculations yourself, you should consider signing up for Andreas’s membership site here: Equity Momentum Report.

How Stocks on the Move Works

Stocks on the Move is a momentum strategy that identifies stocks that have strong momentum.  Stocks that rank high are in a strong uptrend.

The ranking is the heart of the system.  Clenow uses statistical calculations based on prior price action to generate a rank based on what is called the Modified Slope Value.  That value is determined by multiplying an annualized exponential slope value and a coefficient of determination (r-squared) value.

The highest ranked stocks on that list become candidates for purchase because it shows which stocks are trending up the strongest. Based on momentum principles, these strong momentum stocks tend to continue to go higher.

Let’s get into more details about how Stocks on the Move works.

Universe of Stocks

In the U.S. there are something like 6000 publicly traded stocks a trader can choose from. That includes everything for the biggest stocks like Google and Apple to the smallest stocks like mining companies or tech start-ups.

To keep things simple and easy for the Robotic Investing Trend Following System, I stick with the S&P 500 as my basket of stocks to choose from.

The reason is simple: these are the most liquid (lots of shares available to trade) stocks and the best of the best. To get into the S&P 500, companies need to be strong and big and that gives traders some protection.

Market Filter

Stocks on the Move uses a market filter before buying any stocks.  One of the hardest things to do as systematic or rules-based investors is make money against the trend.

Stocks on the Move uses a simple rule to indicate if it is ok to open new positions or not.

If the S&P 500 is trading above its 200 day moving average then new positions can be added to the portfolio.

If the S&P 500 is trading below its 200 day moving average, new positions cannot be added to the portfolio.

This does not mean that all positions are sold if the S&P 500 is trading below the 200 day moving average.  There are different sell rules which will discussed later). It only means that when the market is trending down, which the 200 day moving average can tell us, then the system does not add any new position.

This may mean sitting on your hands for a few weeks at a time, not initiating any new positions. The benefit is that you don’t buy into a dropping market and risk losing way too much money on the way down.

Ranking Method

The ranking method is the heart of Clenow’s momentum system. It takes all the stocks in the S&P 500 and ranks them according to a modified slope value.

Statistical calculations are used to determine which stocks have the highest probability of being winning trades.

Each stock in the S&P 500 is given a volatility adjusted slope value based on the past 90 day close prices. That value is determined by multiplying an annualized exponential slope value and a coefficient of determination (r-squared) value. The resulting volatility adjusted slope value is then sorted from high to low.  The key is that this calculation gives you a stocks that have given great gains over time, but have also moved up smoothly.

The ranking method attempts to weed out strong trending stocks with high volatility.  Clenow sums it up in his book like this:

…stocks that have made substantial gains under massive volatility will be pushed far down the list, far enough to be off the realistic candidates.

Once the numbers are run on all stocks in the S&P 500 and sorted by high to low, you have a ranking of each stock based on momentum and volatility.  The highest ranked stocks become good candidates for investment.

The book outlines how to complete these calculations on your own in a spreadsheet like Excel.

I use TC2000 to do the calculations and rank the stocks. [include a post on how to do that].

Gap Up or Down Test

A gap up or down is when a stock sees a huge price either way in a day. Stocks on the Move avoids stocks that gap up or down in either way because the volatility is way too high, which means the risk is way too high.

To manage this risk the system has a simple rule. If a stock has gapped up or down more than 15% in the past 90 days then it does not get bought, even if it is the highest ranked stock.

100 Day Moving Average Test

Another test that is run to determine if a high ranking stock is eligible for purchase is the 100 day moving average test. Highly ranked stocks are only purchased if they are trading above their 100 day moving average.

Along with the ranking method of the strongest trending stocks, this test confirms the stock is in an uptrend.

Trade One Day Per Week

In the book, the system is traded once per week, and it does not matter what do is chosen.  For the purposes of this site, I will be running the portfolio using a frequency of once per month.  This will not be an exact comparison of the Stocks on the Move book, but will cut down on trading costs, as well as my time to keep track of the portfolio.

This will still give you an idea of how the system works, but results will not be the same.

Position Sizing

The easy method to invest in a stock system is to identify the strongest stocks and simply buy the top 5, 10, 15, 20…stocks on that list. The problem is some stocks on the list are more volatile than others.  These can be more risky.

The way Stocks on the Move determines how much money to put into each of the top stocks is using the average true range (ATR) of the stock.

In simple terms, the ATR measures volatility in a stock. The higher the ATR, the more the stock prices moves on a given day.

Instead of buying equal amounts of the highest ranked stocks, Clenow runs a calculation to determine how many shares of a stock to buy based on the account value. The result is you buy more of the less risky stocks and less of the more volatile ones. The main purpose is to protect capital.

Clenow points out that the world’s best hedge fund managers and traders use concepts like these in their portfolios to protect their downside risk.

Here is how position size is calculated: # of shares to purchase = ((AccountValue * 0.001) / ATR(20)).

What this does is takes the amount of money in my account that I am using for this system, multiplies it by a factor of 0.1% and then divides that number by the ATR for the past 20 days.

The result is the number of shares to purchase based on account size.

The multiplier (0.1% or 0.001) is 10 basis points.  This position sizing method builds a risk parity portfolio, where every stock has an equal chance to impact the overall portfolio. It is this number, along with the ATR that is setting our risk. Using this position sizing formula will generate a portfolio with 20-30 stocks.

Rules-Based Portfolio Construction & Management

There is a lot to take in with the Stocks on the Move system. However, once you get your head around it, it is pretty simple.

Step 1: Determine Market Trend

  • Check if the S&P 500 is trading above or below it’s 200 day moving average.
  • If the S&P 500 is trading above the 200 day moving average, build or make changes to your portfolio.
  • If the S&P 500 is trading below the 200 day moving average, do nothing. Wait until the market starts to trend up again.

Step 2: Build Initial Portfolio

  • Calculate the volatility adjusted slope value based on the details in the book.  Sort from highest to lowest value.
  • Disqualify any stocks that are trading below their 100 day simple moving average.
  • Disqualify any stocks that have gapped up or down 15% in the past 90 days.
  • Calculate the 20-day average true range for each stock.
  • Using a risk parity value of 0.001, calculate the number of shares to buy with this formula: # of shares to purchase = ((AccountValue * 0.001) / ATR(20))
  • Start to buy the highest ranked stock with the correct number of shares.  Buy stocks until all capital is spent.

Step 3: Portfolio Rebalance

  • Sell any stocks if the stock:
    • has moved below it 100 day moving average
    • is no longer in the top 100 of the S&P 500 stocks.
    • had a recent gap of 15% either way.
    • left the S&P 500.
  • With the proceeds from any sales go through the same process as in Step 2.  Before making any further buys, make sure the market is in an uptrend, as per Step 1 above.

Step 4: Position Rebalance

  • Twice per month, review the portfolio’s position sizing against original target allocation.
  • Adjust to bring the values in line with the right risk parity.

That are all the steps to complete this strategy.

Research & Backtest Results

If you search for Stocks on the Move on the web, you will find a few resources.  However, it is hard to find people that have actually been using it and talking about their results.  That is why I wanted to run a version of it on Robotic Investing.

Here are a few resources you can check out for more information, with the first obviously being the book!

Finding backtest results is also hard.  This is one strategy that I have not been able to do given the requirements to program it into different trading backtest tools.  However, Andreas does have some backtest results available in his book.  Here is one that provides information on the results – which you can also obtain from his site:

Stocks on the Move - Figure 12 from the BookPretty solid out performance going back to 1999.  I especially like the market filter, which controls the drawdowns during periods like 2008 and 2000 to 2003.

Robotic Investing Implementation

I track real-world implementation of this version of the Stocks on the Move system.  I do alter it slightly to reduce trading time and costs.  Specifically:

  • I trade the system once per month, on the first trading day of the month.
  • I do not do the position rebalancing as recommended in the book.  The portfolio is rebalanced monthly when it comes time to buy and sell S&P 500 stocks.

To see how the portfolio performs in real-time and the real world, check out all the blog posts tagged with Stocks on the Move Strategy category (see sidebar).

Featured Image: Ho’okipa 1 by Aaron Najera