portfolio123 model - vbconversions model . 2 ... oversubscribed its specialized sector focus....

1 DC’s Awesome Internet 5

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DC’s Awesome Internet 5 Portfolio123 Model



System Summary DC’s Awesome Internet 5 is currently the highest performing system on Portfolio123, returning over 180% per year trading 5 US Internet stocks with an average daily liquidity of over $5 million each. This model is an excellent liquid addition to the other trading systems in your portfolio, and is unlikely to correlate with other P123 models given its specialized sector focus. This system has never had a losing year and has beaten the S&P 500 index by a wide margin annually. In 12 of the last 15 years the annual return was in the triple digits, including over 800% in 1999, and the lowest annual return was 31% in 2012. Note that there will be little overlap with the stocks traded by the other Awesome models as they all have a broad focus and do not specialize in a particular sector. This system uses hedging to protect against market downturns, but is less dependent on a hedge as the model returns over 120% annually without the hedge applied With the $5M daily volume trading requirement, liquidity should not be an

issue with this system. Assuming an average trading size of $10,000 per subscriber, it would take 125 subscriptions to reach 5% of daily trading volume. This is highly unlikely as the max subscriptions on any paid model is currently 65, and regardless the system will not be allowed to be oversubscribed. Between the high liquidity and average holding time of 20 days, this is a very tradable model. You don’t have to be an expert trader or worry about getting good fills to profit with this system.

Introduction



System Alternatives By using different hedging vehicles other than the default of ProShares Short S&P 500 (SH), you can have higher or lower risk variations of the system to suit your preference as shown below. For more details, see the Hedging Vehicle Test.

Hedge Annual Return

ProShares Short S&P500 (SH) 180.77%

Cash 130.82%

Short term bonds (SHY) 130.19%

Med term bonds (IEF) 137.44%

Long term bonds (TLT) 143.84%

ProShares Short Russell 2000 (RWM) 190.88%

ProShares UltraShort S&P500 (SDS) 229.11%

Methodology Primary stock ranking methodology is provided by a classic balanced system based on earnings (30%), technical (20%), valuation (40%), and industry leadership (10%). As a secondary methodology, other stocks meeting liquidity and price requirements may be included if they meet certain technical analysis patterns indicating a price gain may occur, and certain stocks normally picked by the primary methodology may be excluded if technical patterns indicate a potential price decline. Selling occurs when the ranking of the primary methodology drops below an acceptable level or when a technical price pattern indicates a possible drop in the stock price. Hedge entry occurs based on a moving average crossover of the S&P 500 estimates trend and a corresponding index price drop, or based on technical patterns of the index which indicate a sector downturn may be imminent. Conversely, a hedge exit will occur based on a

moving average crossover of the S&P 500 estimates trend and a corresponding rise index, but may also be triggered by a technical pattern in the index indicating a potential rise in the sector.

Performance Details

The following section will show details from the model’s test from 1/2/99 to 4/27/14, with screenshots taken directly from Portfolio123. Shown are the system summary, performance stats, trading stats, and trading risk screens.

Robustness Tests

Robustness tests were also run based on varying the weekly start date, starting and stopping the test yearly and every two years, changing the minimum price and liquidity requirements, and by varying the number of positions. The hedging model was also tested with different hedging vehicles, trading through the hedge, and by the percent hedged. A summary of the robustness tests are below, with the detailed results on the follow pages: Weekly test: changing the start date weekly for the first 20 weeks results in an annual return of 155.12% - 180.62%, with an average of 164.22%.



Robustness Tests (continued)

Yearly test: starting and stopping the model each year results in an annual return from 28.3% to a whopping 875.97%. 12 of the 15 years produced triple digit returns, and the average of all years is 214.5%. Two year test: Starting and stopping the model every two years results in an annual return from 79.81% to 421.18%, with an average annual return of 195.19%. Minimum price test: This model has a $1 per share minimum price. Varying the minimum price from $1-$20 results in an annual return from 115.04% to 181.97%, with the lower price minimums doing better than the higher as expected. Minimum volume test: This system has a requirement of $5M daily volume. Varying the minimum daily volume from $1 to $60M results in an annual return of 60.85% to 180.62%, with the lower volume requirements doing better than the higher as expected Number of positions test: This model holds 5 stock positions. Varying the number of positions from 100 to 5 results in an annual return of 29.19% to 180.62%, with the lower number of positions performing better than the higher as expected.

Hedging ratio test: Varying the hedging ratio from 100% to 10% results in an annual return of 132.45% to 191.08%, while completely un-hedged returns 126.75%. As can be seen, this system is less reliant on a hedge than many other Awesome models. Trading through the hedge test: If the system continues to trade during the hedge period along with hedging using SH, the annualized return is 160.90%. Hedging vehicle test: The default hedge for the system is the ProShares Short S&P 500 (SH). Alternate hedging vehicles can significantly reduce risk or increase performance, depending on your preference. Using lower risk hedges such as cash or bonds returns 130.19%-143.84%, while higher risk alternatives return 190.88% to 229.11%.



Summary The following details system performance from 1/2/99 to 4/19/14. The screenshots are directly from Portfolio123.

The liquidity of the bottom 20% of trades is over $139 million, currently outperforming all

Model Performance



Performance Stats

Trading Stats



Trading Risk



Weekly Test The regular test is over a 15 year period from 1/2/99 to 4/27/14. Changing the start date weekly for the first 20 weeks results in an annual return of 155.12% - 180.62%, with an average of 164.22%.

Robustness Tests



Yearly Test Rather than running a continual 15 year test, if the model is started and stopped each year from 1999 through 2013, the annual return varies from 28.3% to a whopping 875.97%. 12 of the 15 years produced triple digit returns, and the average of all years is 214.5%.



2 Year Test Rather than running a continual 15 year test, if the model is started and stopped every two years this results in an annual return from 79.81% to 421.18%, with an average annual return of 195.19%.

Minimum Price Test The model requires a minimum stock price of $1. Varying the minimum price from $1-$20 results in an annual return from 115.04% to 181.97%. As would be expected, the lower price thresholds did better while the higher ones did worse, but as desired the performance varied relatively smoothly as the price was changed.



Minimum Daily Volume Test The model requires a minimum average daily volume of $5M over the last 10 days. Varying the minimum daily volume from $1 to $60M results in an annual return of 60.85% to 180.62%, with the lower volume requirements on average doing better than the higher as expected.

Number of Positions Test The number of positions in the model is 5. Varying the number of positions from 100 to 5 results in an annual return of 29.19% to 180.62%, with the lower number of positions performing better as expected. As with the other tests, the performance change was relatively smooth as the number of positions was adjusted.



Hedging Ratio Test When entering a hedge, the model is hedged at 100%. Reducing the hedging percent causes performance to drop smoothly. Varying the hedging ratio from 100% to 10% results in an annual return of 132.45% to 191.08%, while completely un-hedged returns 126.75% annually. As the test results show, this system is much less reliant on a hedge than other Awesome models. Note that the starting balance had to be reduced from 10k to 5k for this test to avoid a P123 error of the 90% hedge exceeding a max value of 100B. This caused a ~0.02% variance in the annualized return.

Hedging Vehicle Test The default hedge for the system is the ProShares Short S&P 500 (SH). Alternate hedging vehicles can significantly reduce risk or increase performance, depending on your preference. Using lower risk hedges such as cash or bonds returns 130.19%-143.84%, while higher risk alternatives return 190.88% to 229.11%. This system is also less reliant on a hedge as other Awesome models, as its annual return is 126.75% when tested without a hedge.

Risk Category Hedge Annual Return

Drawdown

(System default) ProShares Short S&P500 (SH) 180.77% -35.45%

Lower risk Cash 130.82% -35.45%

Lower risk Short term bonds (SHY) 130.19% -35.45%

Lower risk Med term bonds (IEF) 137.44% -35.45%

Lower risk Long term bonds (TLT) 143.84% -35.45%

Higher risk ProShares Short Russell 2000 (RWM) 190.88% -43.53%

Higher risk ProShares UltraShort S&P500 (SDS) 229.11% -40.05%

Trading Through the Hedge Test If the system continues to trade during the hedge period along with hedging using SH, the annualized return is 160.90%, with a max drawdown of 67.99%.



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Final

Conclusion DC’s Awesome Internet 5 is currently the highest performing system on Portfolio123, with a high average annual return of over 180% based on a 15 year test, and has excellent liquidity. Given its sector focus, it should correlate well to other systems in your portfolio. The model also performs well on robustness tests based on a variety of factors, and alternate hedging approaches can increase return or reduce risk as desired.

Warning

Warning - don’t put all of your money in this or any other individual trading system, but only as part of a well-diversified portfolio, including cash and other asset classes. Regardless of testing, this is only a five stock system and may experience periods of high drawdowns and volatility. Note: Simulation results must be interpreted in light of differences between simulated performance and actual trading, differences between subscriber performance and live out-of-sample model performance, and the fact that past performance is no guarantee of future results. (See Subscriber Terms.)

portfolio123 model - vbconversions model . 2 ... oversubscribed its specialized sector focus....

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