I have several industry rotation models.? Some are short-term, others are longer term.? My main one is in the back of my head as I analyze where the pain is growing, and nearing maximum intensity.? (If anyone wants me to share shorter term models, I can do that.? I don’t use them much though.)
For me, the idea in industry rotation is to find stocks that fit one of two paradigms: 1) strong companies in troubled industries, and 2) well-run, cheap companies in industries where favorable trends are over-discounted.? My main model attempts to address the former.
My model has 6 1/2 years of Value Line industry rank data.? It asks the following questions:
- What is the industry’s current rank?
- Relative to your rank history, where is your current rank compared to the maximum and minimum ranks?
- How many standard deviations are you above or below your average rank? and
- Compared to past history, what percentile is your Value Line rank compared to prior dates in history.
The results from these questions are weighted and turned into a grand rank. From highest to lowest, the weights go 1, 4, 3, 2 for the questions listed above.? This spreadsheet lists the final results.?? Now the new ranks can be used in two ways, in value mode, or momentum mode.
Value Line ranks are a product of three factors: price momentum, earnings momentum, and analyst surprise.? They are momentum driven.? My model attempts to refine that, and give investors two ways to play the market.? If you like fast momentum-style trading, buy the companies in the red zone near the bottom of the list.? If you’re like me, buy the companies in dead industries in the green zone at the top of the list.
So what did I do here?? The list of industries entitled “dig through” I deemed interesting from the “green zone.”? I ran a screen on them to get a few more names for this current portfolio reshaping.? Here are the tickers:
HERO ADM SMG SE ABFS CMC CVX ESV GMRK GSF HES MRTN NAT NE NX OXY PDE PTSI RADN RDC SHOO TSO
Okay, so now I have two things ready to go: I have the full list of tickers that I will compare against my current portfolio.? I also have what my main industry rotation model recommends.? I call my methods “quantitative assisted,” because I use my intellect to overrule them when I think it is needed.?? The next step is lining up all of the candidates against my current portfolio to help decide who to add in , and who to kick out.? More on that on Monday.
I have two computers – one without Excel – so I copied your spreadsheet into a Google spreadsheed so I could access it from both. I hope you don’t mind, but I wanted to share the spreadsheet for anyone else here that might have the same issue: http://spreadsheets.google.com/pub?key=pe9NJ39G-SRbM9tpaw7veBQ
If you do mind, let me know and I’ll take it right down.
Do you find yourself overriding your model frequently? I noticed you didn’t mark homebuilding or thrift to dig through even though they score highly, and ADM and SMG made it into the final ticker list even though they’re not strictly in the ‘green zone’. My first instinct would be to think that it’s a offshoot of the oil producer bias, investing in ethanol demand, and I was curious if there was a method to overriding the method.
amccabe — no, go ahead and leave it up. If I post something, it’s fair game for those who want to use it.
I override my models when they don’t make sense. Aside from that, I leave out financials (and housing-related stocks) because they get me into conflicts of interest with my employer. On my own, I would be looking at the highest quality mortgage lenders and banks at present.
There are some names that make it through just because they seem cheap enough to consider, aside from their industry. They have to be meaningfully more cheap though, to make it through the next step, which I plan on posting tonight.