No. of Recommendations: 2
Build a blend of screens that do well overall, but do particularly well
in bull markets, and do the same for bear markets. A nice diverse
blend in each case---a few stocks from quite a few different screens.
Don't worry about overtuning, just get two blends, one of which is
full of bull market winners, and one full of bear market best-you-can-do.



Jim,

If I understand you correctly, the screen selection would go something like this:

1. Select a pool of candidate screens that do reasonable well all of the time.
2. From this, select a subset of best screens for bull periods.
3. Similarly from the pool of screens selected in 1, select a subset of best screens for bear periods.
4. Figure out some method to switch between.

I like this logic, but it is not so easy to implement in real life. I tried doing this a few years ago. The issues I came up with were:

1. The pool of screens I trusted as "reasonably good" for all periods was pretty small.
2. I ended up with a lot of overlap between the bull and bear screens.
3. The backtested gain (relative to a blend) was not as much as I would like.
4. If you switch much, it messes up a HTD strategy for minimizing trading.

My final conclusion was just to construct the best blend I could; use HTD to minimize trading and stick with it through bull and bear.

I suppose I should say that I think the concept of a switch is OK, but it introduces the ability to do a good bit of extra tuning i.e.:

* The backtest of each half of the switch is cut approx in half so is less robust.
* You can tune by picking various indices and screens to switch on.
* You can tune the cut-off

All of this really means that the burden of stress testing the backtest is so much greater - i.e. it is that much more difficult to figure out if the backtest has predictive value.

StevnFool
Yes - a genuine Irishman. Born in Ireland and lived all my life here so far except for a few vacations.
Print the post  

Announcements

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.