Message Font: Serif | Sans-Serif
No. of Recommendations: 4
The following is an interesting analysis of downturns in one of the most popular relative strength screens on the MI board, the RS Overlap. (MI post#66149)

Given the recent volitlity in the market, I wanted to
see how one of my favorite screens has fared in times
past, so I exported the data for RS-O 13/26 1-25:3 to Excel
and starting looking at the drawdowns and recovery
periods for this screen. What I found was that this
current volatility is nothing new.

The questions I wanted to answer were:

1. How frequent does a downturn of more than 20% occur?
2. How long does it last?
3. How long does it take to recover?

I choose periods of 3 or 4 negative months in a row,
or a 2 month drop greater than 20%. This is a hand
analysis of one screen, that I did to get a feel for
how it behaves.

Here is the data:

Dates _______________ Drawdown_______Months torecover

Jun-Sep 86______________-35.7%__________7
Oct-Nov 87______________-46.4%__________10
Oct 88-Jan 89___________-13.4%__________3
Jun-Aug 90______________-17.9%__________4
Mar-Jun 92______________-17.0%__________3
Oct 93-Jun 94___________-32.6%__________6
Jun-Jul 96______________-20.3%__________4
Oct-Dec 97______________-28.7%__________4
Aug-Sep 98______________-23.3%__________2


1. Significant drawdowns (greater than 15%)on the RS-O
screen appear to be typical and periodic.
2. There have been 9 drawdowns greater than 15% going
back to 1986.
3. The average drawdown was around -26%.
4. The average recovery period was 4-5 months. That is
the number of months to get back to where you
started before the drop.
5. Most of the downturns only lasted 3 or 4 months.

I find it most interesting that the typical downturn
lasted around 3 months, which is equal to the RS-13
component. I wonder if this is the time it takes for
the screen to "react" to the changing market and pick
up new leaders.

One final number, it has been 17 months since our last
downturn where we had two negative months combined for
-23.3%, so maybe we are due.

Based on the first Friday pick, our first negative
period for RS-O was March at -13.5%. If history
repeats itself, we could expect 1 or 2 more negative
months, followed by a 3-4 month recovery back to the
pre-drop levels.

Oh yeah, despite all of these downturns, if you had
invested $10K in Jan-86, you would have over $18M now.

Print the post  


What was Your Dumbest Investment?
Share it with us -- and learn from others' stories of flubs.
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and Glassdoor #1 Company to Work For 2015! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.