Wednesday, September 9, 2015

Investment Optimization Model (IOM) Performance - August 2015

August turned out to be a very interesting month. It all started with market's internals deteriorating towards the end of July, which created a scenario where either market would have set-up a break-out or could start a sharp decline. In this situation, China came out with a plan to de-value their currency to prop-up their economy. However, this plan un-nerved the global markets.

This nervousness led to a global market sell-off in mid-August. Although the market managed to put-on a very sharp and impressive 1000+ point rally, it was not sufficient to keep it into the Bull territory. As a result of this decline, markets have now entered Bear market territory based on our proprietary Bull-Bear model. This model last signaled a top in Feb 2008 and prior to that in March 2000. Therefore, we can expect some serious decline ahead.

However, before the start of the decline, we might see a sharp rally for a couple of monthly to test certain key levels and suck back investors into the market, how people were sucked in in March/April 2008 and late 2000, before the sharp decline.

In such dangerous market environment, Investment Optimization Model portfolio once again outperformed the market. Since March 2015, IOM has beaten DJIA (w/ dividends) by 4% (model is down 3.7%, while total return DJIA is down 7.7%). Furthermore, now that the market is in a bear market, the model has gone 100% cash and is looking towards shorting model (currently under development).

In other words, model has generated Alpha without taking on extra risk and is now in a position to not only avoid bear market losses and beat the market, but also to take advantage of the decline. Model's in built, risk management mechanisms ensured removal of underperforming stocks and heavier allocation to stocks with better fundamental and technical pictures. 

The Investment Optimization Model (IOM) has been developed to manage risk and amplify gains. In order to do so, the model is deigned to out-perform its benchmark in following three distinct environments: :

1- A market which is trending up
2- A market which goes sideways and down
3- A Bear market

In an up-trending market, the model's components will outperform its benchmark because the stock selection is based on a systematic method of identifying stocks exhibiting certain features and higher gain potential.

At the same time, strict risk management process ensures that if a single entity is doing bad, asset allocation is reduced. In a sideways market, the model is designed to outperform and preserve capital.

Finally, in a bear market, model will not only preserve capital using proprietary risk-management strategies, it will also short the market and diversify in other asset classes.

Therefore, the model is very holistic and so far in 2015, it has proved to be very valuable. Moving forward, we are working on enhancing the model with additional business rules to not only amplify portfolio's return potential by combining it with the proprietary Inflection Point Model. We will keep the blog updated with latest performance and enhancements.