Jake’s Patent Winners was the best performing VectorVest Model Portfolio in Canada in 2014, up about 46%. I received an interesting question about it by email this morning from one of our Toronto (Guelph) area subscribers. Others may be wondering the same thing, so I decided to post my reply below. Here is what he was asking:
I am studying Jake’s Canadian portfolio. I see it is a long/short portfolio. I want to know more about how it works. I was wondering why is it holding 20% in cash and does not have a short position. I like the results. I just want to know the rules. Is there a manual for it that you can email me? Maybe they decided not to short. I see they sell when VST drops below 1.2 and use confirmed calls to buy. I just wonder what else am I missing. Thanks for your help.
The trading rules for the portfolio are set out in the graphic above. You get this information when you Select An Existing Trading System when setting up a new portfolio. Simply choose, Jake’s Paten Winners. Well, Canada received a C/DN signal way back on September 19. So why haven’t any short positions been added? The reason is because there are still 4 long stocks in the portfolio after HCG was sold Sept 24. Now, notice the settings for the Rules C/DN. It states, “Try to maintain 3 positions.” Well, when we got the C/DN on Sept 19 and every day since, the Genius looks and sees there are still more than 3 stocks in the portfolio. Four is more than 3, so there is still no room to add a short position. Two more long positions would have to be sold in order to create room for one short position.
By then it might be too late, although not always if the downturn is a long one and your shorts drop quickly (no pun intended). I actually think this might be a limitation in the backtester and portfolio manager. It does not allow the ‘hedging’ you might expect to happen immediately after your chosen market down signal is given, in this case the C/DN.
If the trading plan’s intention is to hedge with short positions or contra ETFs, then I think the specified number of short positions should be added when the market signal is down, regardless of how many long positions remain in the portfolio. In the case for Jake’s for example, that would mean we could have up to 8 positions – the maximum of 5 longs and maximum of 3 shorts. To do this, the Genius would have to have a separate setting for the maximum number of positions total in the Portfolio, independent of the maximums for long and short positions. I’ve asked Development if this change might be possible. Perhaps someone would like to add it to the NEW FEATURE requests from the link on the Training tab?
How would this have affected Jake’s performance since the Sept 19 C/DN. Wouldn’t you know, in this case it would have cost the portfolio money. Why? Jake’s Patent Winners is up an amazing 18% since Sept 19 with the MG, ATD.B, GIL and CP remaining in the portfolio. Again, HCG was sold Sept 24, its VST score having fallen below 1.2. The VVC/CA is down about 3.44% during the same period in what can only be described as a wild ride.
What about those 3 shorts if they had been added Sept 22, the first trading day after the C/DN call? Well, two of the top 3 Hindenburg stocks from the Searches-Short folder on Sept 19 have moved higher. Not a good thing when you’re shorting. A Quicktest with no money management shows an average GAIN of 11.23%. Intertain Group (IT) gained 23.53% but would have stopped out with a 15% loss. Descartes Sys (DSG) is up 11.66% so it too would have cost the portfolio. Carfinco (CFN) is down (-1.50%), the only winner so far. So, shorting in this case would have cost the portfolio about five or six percent. The cost of insurance perhaps?
Your thoughts anyone?
– submitted by Stan Heller, Consultant
January 10, 2015