Adding A New Factor

Updating Security Selection

This post was originally shared via or email list on June 29th.

Each day the market’s open, our system gauges stock and options market sentiment to rank securities by its estimate of their potential returns over the next six months. We made a slight change to our selection process last week, incorporating a new factor we’d been tracking for the last year or so. More on that below, but first, these were our top ten names as of Friday’s close. 

Screen capture via Portfolio Armor on 6/24/2022.

As you can see above, they were all long energy names, thanks in part to the new factor we added. The new factor is based on historical data we’ve been tracking which shows that, all else equal, securities that underperformed over the last week and month relative to their historic averages, outperform ones that did well over the most recent week and month.

So you can see why this list was heavy with energy names, given their recent pullback. Here’s how Friday’s top names had performed as of Tuesday’s close: up 10.19% versus -2.42% for SPY.

It looks a mean reversion effect, but we’re continuing to track this as new data comes in each trading day, and adjusting our factors accordingly.

We’re also tracking a “plain” version of our top ten without our additional factors, for comparison purposes: the numerical value of our factors going forward will be based on their outperformance (or underperformance) relative to our plain top ten. 

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