Back in January, we published a white paper that discussed using relative strength and portfolio management. If you haven’t read the paper (or would like to read it again) it can be found here. (Note: Please see the original paper for all of the necessary disclosures.) The original paper also outlines the unique process we use to test various relative strength factors. All of the data in that paper was updated through 2009. Since we have just finished updating all of our data through the end of Q1, we can update the data in the paper.
The first quarter was very good for relative strength. The data in the original paper showed that the best returns come from an intermediate term time horizon (about 3-12 months). Last year that was very different. We found very good returns for 2009 at very short-term time horizons. A 1-Month RS factor was actually one of the better performers in 2009. Over longer periods, a 1-Month RS factor has been a very poor performer so we definitely saw some anomalies during the huge laggard rally last year. The first quarter of 2010 was much more normal for relative strength strategies. The table below shows the performance for the first three months of 2010 for all of the models we tested in the original paper.
(Click To Enlarge)
The best returns came in the 6-12 month time horizon, which is what we would expect. (For those of you who are confused about the “Factor,” it is not a holding period. It is the lookback period for calculating relative strength. So the 6-Mo Price Return, for example simply takes the 6-month return for all stocks in the universe and ranks them from best to worst.)
The next table shows the cumulative annualized returns for all of the models updated through 3/31/10.
(Click To Enlarge)
The various models keep chugging along! The intermediate term factors work very well. Even when we are throwing darts at a basket of high relative strength stocks we find 100 out of 100 trials outperforming the benchmark over time. As the original paper showed, relative strength models aren’t going to outperform each quarter or each year, but over time they do exceptionally well.
