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Author: Zeelotes Big red star, 1000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 5980  
Subject: Backtest: Dow BI and Yield Curve Date: 3/15/2005 9:02 AM
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Introduction

I'd like to give you an idea of just how powerful the BI Classical system is without any improvements made -- like EMAs and the other huge list of methods that have been attempted. One of the most powerful tools in my investor's toolbox is the Yield Curve. This is a means for avoiding major market corrections. When applied to indexes that I have with a history back to 12/31/1972 these are the results -- the Yield Curve returns are all the values on the left side. Notice that the ^IXIC -- Nasdaq Composite -- has a CAGR improvement of over 122%, with a drop in the GSD of nearly 25%. That is pretty remarkable as indicators go. Even the S&P 500 with Dividends included is improved by over 50% on the CAGR while the GSD drops over 15%. The two columns on the right show how much the CAGR and GSD is improved using the Yield Curve on these indexes. During the bearish periods called by the Yield Curve the money is put into 1 Year T-Bills and earns a CAGR of 9.73%! Not too bad.
                                                                                         LTBH    LTBH    LTBH      Improve   Improve
Results CAGR GSD(D) Sharpe Signal % of Time Yrs >= 0 Trades Drawdown Bullish CAGR GSD(D) Yrs >= 0 CAGR GSD(D)
^DJI 13.41% 15.56 0.47 83% 75.80% 84.85% 5 | 1 -36.13% 14.61% 7.61% 18.27 68.75% 76.22% 14.83%
^DJT 15.38% 17.99 0.53 83% 75.80% 72.73% 5 | 1 -40.17% 17.25% 9.19% 21.82 56.25% 67.36% 17.55%
^IXBK 16.86% 10.57 0.91 83% 75.80% 87.88% 5 | 1 -41.67% 19.24% 10.84% 12.74 78.13% 55.54% 17.03%
^IXFN 19.94% 15.01 0.86 83% 75.80% 87.88% 5 | 1 -38.92% 23.40% 10.77% 19.06 75.00% 85.14% 21.25%
^IXIC 20.20% 16.23 0.84 83% 75.80% 84.85% 5 | 1 -45.90% 23.75% 9.09% 21.56 68.75% 122.22% 24.72%
^IXID 18.59% 16.63 0.74 83% 75.80% 84.85% 5 | 1 -41.03% 21.56% 8.58% 21.72 68.75% 116.67% 23.43%
^IXIS 15.42% 13.04 0.65 83% 75.80% 84.85% 5 | 1 -32.47% 17.29% 10.21% 15.60 81.25% 51.03% 16.41%
^IXTC 19.55% 23.30 0.69 83% 75.80% 87.10% 5 | 1 -50.35% 22.86% 7.96% 28.96 73.33% 145.60% 19.54%
^IXTR 15.86% 15.17 0.63 83% 75.80% 84.85% 5 | 1 -43.72% 17.88% 9.62% 18.39 75.00% 64.86% 17.51%
^IXUT 19.54% 24.71 0.61 83% 75.80% 87.88% 5 | 1 -68.66% 22.86% 7.95% 29.72 71.88% 145.79% 16.86%
^LXD 20.81% 24.63 0.65 83% 75.80% 87.88% 5 | 1 -53.24% 24.58% 1.57% 60.65 71.88% 1225.48% 59.39%
^NDA 14.16% 14.48 0.52 83% 75.80% 90.91% 5 | 1 -35.33% 15.00% 7.87% 17.19 71.88% 79.92% 15.76%
^NFA 13.45% 17.61 0.42 83% 75.80% 81.82% 5 | 1 -46.07% 14.08% 6.86% 20.33 71.88% 96.06% 13.38%
^NHZ 14.82% 25.40 0.38 83% 75.80% 78.79% 5 | 1 -48.72% 15.84% 7.99% 28.45 65.63% 85.48% 10.72%
^NNA 9.85% 13.01 0.25 67% 75.80% 81.82% 4 | 2 -47.40% 9.47% 3.88% 15.08 66.67% 153.87% 13.73%
^NYA 13.62% 13.70 0.52 83% 75.80% 84.85% 5 | 1 -33.02% 14.89% 7.64% 16.18 72.73% 78.27% 15.33%
^SPX 14.03% 14.99 0.52 83% 75.80% 90.91% 5 | 1 -33.75% 15.44% 7.52% 17.73 72.73% 86.57% 15.45%
^SPXD 16.81% 15.00 0.69 83% 75.80% 93.94% 5 | 1 -33.02% 19.16% 11.15% 17.75 75.76% 50.76% 15.49%


Yield Curve on Classical Dow BI Stocks

When this exact same method is applied to the BI stocks one would expect a vast improvement like we see in the indexes above, but that does not happen.
     Yield Curve        CAGR   GSD(D)  GSD Ratio  Sharpe  Sortino  Signal  Stock  Yrs >= Index  Yrs >= 0  Trades   Drawdown  % of Time
Dow Jones 7.61% 18.27 0.11 69.70% -45.08%
20 Stocks LTBH 22.94% 25.42 1.01 0.73 1.07 88% 77% 84.85% 84.85% 28 | 4 -57.01%
20 Stocks Yield Curve 22.67% 22.33 1.01 0.78 1.15 73% 67% 78.79% 90.91% 73 | 27 -53.97% 75.80%
5 Stock LTBH 25.45% 26.21 1.02 0.80 1.18 94% 83% 84.85% 90.91% 30 | 2 -57.01%
5 Stock Yield Curve 24.01% 22.64 1.02 0.83 1.22 74% 72% 78.79% 90.91% 74 | 26 -53.97% 75.80%

In each case, using a 20 stock hold or a 5 stock hold, the Classical BI approach beats the YC method. Having said this, however, I would definitely invest using the YC method simply because of the protection it provides. We are getting nearly the same results while putting our money at risk only 76% of the time. The lower GSD and higher Sharpe values also demonstrate an investment approach that is suitable for the risk adverse.

If you are interested I can also show you the All Start Days results which speak volumes about why the YC method is optimal.

Having said this, I would say that it is quite amazing how well the Classical BI Dows do compared to the indexes I've posted above. Frankly, I find it quite amazing. Dowbuys has found a method that is both consistent and robust. Congratulations! The only exception for the whole period is really 2002.
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