On April 28th, Tim Fortier of True Market Insiders published Sell In May? No Way! where he proposes playing something of a “hot hand” strategy. This is a dynamic trade which is adjusted monthly.
His construct includes taking a long position in the top performing stock of the Standard and Poor’s 100 Index over the previous six months. The second part of the portfolio is cash. The weight (allocation) of funds going in the stock is determined by setting the overall volatility of the portfolio to equal that of the market. Currently the market’s volatility is fifteen percent according to Fortier.
But in order to calculate the proportion to be invested in the stock, one must know both the volatility of the market and the stock in question. These variables may be found with some research but the final numbers will depend on the the timeline used. For example, if we just recently came out of a high volatility market, the volatility numbers will be higher if we use a relatively short timeline versus a longer timeline. And whether we use a three month window or six month window is subjective.
Tim writes that his strategy has returned 28.2% compounded annually from 2010 through 4/27/2021 compared to the S&P 500’s 14.6%. That’s a good return. But perhaps something even better is possible.
Tweaking It
Tim’s strategy is straightforward. On the last trading day for each month, identify the top performing S&P 100 stock for the previous 6 months. On the first trading day of the next month, create a simple portfolio consisting of (1) a long position in that top performing stock and (2) cash. Target the portfolio to have the same volatility as the overall market, currently fifteen percent. This targeting will determine the percentages of the funds to be allocated between the stock and cash.
We can simplify this strategy by dropping the cash altogether and going “all in” on the hot stock. Of course by dropping the cash, the portfolio becomes riskier. But with greater volatility comes greater potential for an even higher return.
Trading and Testing It
This past Monday, May 3rd was the first trading day of the new month. On April 30th (the last trading day of last month), the best performing stock in the S&P 100 for the previous 6 months was Wells Fargo & Company (WFC). Tim also notes this in his post.
Now, I am testing this adjusted strategy. On Monday, I purchased twenty-two (22) shares of WFC at $45.53 for a grand total of $1,001.66. This was the closest I could get to an even $1,000. I will hold these shares through the end of the month. On Friday, May 7th, the stock price closed at $46.54 which is a 2.2 percent return over five days. Not bad.
On the last trading day of May, I will review how well WFC did and repeat the process in June. Will WFC remain king or will Capital One Financial, Simon Property Group, or Goldman Sachs take the throne? Will Tesla regain the crown? Or will it be Exxon Mobil, once the largest company on Earth? Stay tuned to find out.
[…] is a follow-up to my last post, Tweaking, Trading and Testing Tim’s Strategy. May 3rd was the first trading day for that month so I bought twenty-two shares of Wells Fargo […]