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Even in periods where a stock market index such as the S&P 500 rises, many stocks fall sharply. Several reasons could explain this decline: bad news, earnings release below the analysts consensus, big sell orders from institutional traders (micro and small cap stocks are likely to react more to these kinds of orders)...
The following trading system analyzes stocks and buys the ones that had a sharp fall while the market (S&P 500) is rising. A sharp decline is signaled when the 10-Bar return is between -10% and -20%. The S&P 500 index return for the last 20 bars should be higher than 0%.
There are often many buy signals (more than the maximum number of positions in the portfolio, which is equal to 20) in each period. To get stocks with higher potential increase, a long ranking system based on the inverse value of the 10-Bar average traded volume was created. Stocks with lower trading volume get higher priority. They are usually the stocks that have the lowest market capitalization.
The sell rule consists of a simple 5-Bar stop rule. Every trade or position is sold after five trading days.
Here are the trading system stats after performing a backtest: (2001-2011 period)
Annual Return: 46.63%
Maximum Drawdown: -13.75%
Number of Trades: 6529 (50.9% of them are profitable)
Sharpe Ratio: 2.63
Sortino Ratio: 4.24
Ulcer Performance Index: 7.32
Average Monthly Return: 3.31%
Exposure: 74.87% (The strategy is invested 74.87% of the time)
External Symbol:
This strategy references "^GSPC", which is the ticker symbol of the S&P 500 Index. You have to download historical EOD data for this index before backtesting this trading system or using it in a portfolio.
