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An Investment Strategy to Beat the U.S. Stock Market for Investors and Professionals

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An Investment Strategy to Beat the U.S. Stock Market for Investors and Professionals AN INVESTMENT STRATEGY TO BEAT THE U.S. STOCK MARKET FOR INVESTORS AND PROFESSIONALS A thesis submitted in fulfillment of the requirements for the certification of MASTER OF FINANCIAL ANALYSIS (MFTA) By ALESSANDRO MORETTI MARCH 2019 From INTERNATIONAL FEDERATION OF TECHNICAL ANALYSIS ABSTRACT AN INVESTMENT STRATEGY TO BEAT THE U.S. STOCK MARKET FOR INVESTORS AND PROFESSIONALS A thesis submitted in fulfillment of the requirements for the certification of MASTER OF FINANCIAL ANALYSIS (MFTA) By ALESSANDRO MORETTI MARCH 2019 From INTERNATIONAL FEDERATION OF TECHNICAL ANALYSIS The US stock market is one of the most difficult for professional fund managers to beat. Statistics say that more than 97% of actively managed funds have failed to do better than the US stock market in the last 10 years. Those are really amazing numbers. Private investors are not doing any better. They can try to beat the market by relying on professional managers, knowing that they will most likely do worse. Or they can give up trying to do it themselves but even in this case most of them have neither the skills nor the means to do it. Moreover, they also have to deal with their own emotionality, which pushes them to liquidate their investments during the strong downturns typical of the stock markets. In short, a very difficult situation for both managers and investors. In this paper, I will present an operational strategy which, through technical analysis, relative strength, sector rotation and capital management, enables us to invest and achieve the objective of beating the American stock market in the long term. The presented strategy has the great advantage of being able to be implemented by both small private investors and large managers, via financial advisors. ii Copyright© by ALESSANDRO MORETTI 2019 iii TABLE OF CONTENTS Page ABSTRACT .......................................................................................................... ii LIST OF FIGURES ............................................................................................. iv LIST OF TABLES ............................................................................................... iv 1. INTRODUCTION ......................................................................................... 1 1.1. IDENTIFICATION OF THE TROUBLE ........................................................ 1 1.2. IDENTIFICATION OF THE AIM ................................................................... 3 1.3. REALIZATION OF THE STRATEGY ........................................................... 4 1.4. THE FUNDAMENTAL IDEA ......................................................................... 6 1.5. THE SECTOR ROTATION MODEL .............................................................. 7 1.6. THE RELATIVE STRENGTH ........................................................................ 7 1.7. THE DONCHIAN’S CHANNELS ................................................................. 10 1.8. THE MONEY MANAGEMENT .................................................................... 12 2. MATERIALS AND METHODS ................................................................. 13 2.1. THE TIME FRAME ....................................................................................... 13 2.2. INDICATORS ................................................................................................ 15 2.3. OPERATING RULES .................................................................................... 15 2.4. TWO VARIATIONS ...................................................................................... 16 2.5. THE BENCHMARK ...................................................................................... 17 2.6. FINANCIAL INSTRUMENTS USED ............................................................ 18 2.7. THE PLATFORM .......................................................................................... 20 2.8. HISTORICAL DATA FEED .......................................................................... 20 3. RESULTS .................................................................................................... 20 3.1. FIXED SIZE STRATEGY .............................................................................. 20 3.1.1. PERFORMANCE ANALYSIS .................................................................. 20 3.1.2. PERFORMANCE RATIOS ANALYSIS .................................................. 22 3.1.3. TIME ANALYSIS ....................................................................................... 23 3.1.4. EQUITY CURVE DETAILED .................................................................. 23 3.1.5. DRAWDOWN ANALYSIS ........................................................................ 24 3.1.6. ANNUAL ROLLING PERIOD ANALYSIS ............................................. 25 3.1.7. ANNUAL RETURS & DRAWDOWN ANALYSIS ................................. 27 3.1.8. MONTECARLO ANALYSIS .................................................................... 27 3.1.9. SECTOR BY SECTOR ANALYSIS ......................................................... 29 3.2. PERCENTAGE SIZE STRATEGY ............................................................... 31 3.2.1. PERFORMANCE SUMMARY ANALYSIS ............................................ 31 3.2.2. STATISTICAL DATA ................................................................................ 32 3.3. COMPARISON WITH THE BENCHMARK ................................................ 34 4. DISCUSSIONS ............................................................................................ 36 4.1. COMPARISON WITH THE BEST ACTIVELY MANAGED FUNDS ........ 36 4.2. HOW TO USE THE STRATEGY IN REAL ................................................. 38 4.2.1. INTRODUCTION OF THE ETFS ............................................................ 38 4.2.2. METHODS AND CRITERIAS .................................................................. 40 4.2.3. RESULTS ..................................................................................................... 41 4.2.4. COMPARISON WITH THEORICAL STRATEGIES ........................... 44 iii 4.2.5. COMPARISON WITH THE BENCHMARK .......................................... 45 4.2.6. COMPARISON WIH THE BEST ACTIVELY MANAGED FUND ..... 45 4.3. THE CURRENT PORTFOLIO ..................................................................... 46 4.4. BEYOND THE U.S. STOCK MARKET ........................................................ 47 5. CONCLUSIONS .......................................................................................... 48 LIST OF FIGURES Page Figure 1 Relative Strength line (RS Line) .................................................................... 8 Figure 2 Upper and lower bands of a Donchian Channel ........................................... 11 Figure 3 Using a Donchian Channel in order to identify the begin and the end of a trend in price action. ............................................................................................ 12 Figure 4 Dow Jones Us Total Market's trends ............................................................ 14 Figure 5 Dow Jones Us Total Market in the long run ................................................. 18 Figure 6 Equity curve detailed of the simulation ........................................................ 24 Figure 7 Equity curve detailed with drawdown of the simulation .............................. 25 Figure 8 Annual return & drawdown (%) ................................................................... 27 Figure 9 Equity curve detailed with drawdown of percentage size simulation .......... 33 Figure 10 Dow Jones Us Total Market in quarter by quarter timeframe .................... 35 Figure 11 Pgim Jennison Us All Cap fund from 2000 to 2019 .................................. 37 Figure 12 Wip opportunistic equity A fund from 2000 to 2019 ................................. 37 Figure 13 Equity curve detailed with drawdown analysis of Etf simulation .............. 42 Figure 14 Dow Jones Us Total Market price action from 2008 to 2019 based on monthly timeframe ............................................................................................... 45 Figure 15 Franklin Us Opportunities W fund from 2008 to 2019 .............................. 46 LIST OF TABLES Page Table 1 Active Managed Funds that beat the benchmark ............................................. 2 Table 2 Total trade analysis of the strategy simulation .............................................. 21 Table 3 Performance Summary of the strategy simulation ......................................... 21 Table 4 Performance ratio of the strategy simulation ................................................. 22 Table 5 Time analysis of the strategy simulation ....................................................... 23 Table 6 Annual rolling period analysis of the simulation ........................................... 26 Table 7 Sector by sector analysis ................................................................................ 29 Table 8 Equity Curve Analysis ................................................................................... 30 Table 9 Sector by sector ratio's analysis ..................................................................... 30 Table 10 Comparison between fixed size strategy and variable size strategy ............ 31 Table 11 Performance summary of percentage size simulation ................................. 32 Table 12 Performance ratios of percentage size simulation ....................................... 32 Table
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