**PART 1. ORIGINAL TESTS: RESULTS THROUGH 2002**

Four original tests covering the period 1971–2002 are summarized herewith.

**Original Test 1: Weekly Nasdaq Composite Index 6 Percent Strategy (NC6%): 1971–2002**

The Nasdaq Composite Index (COMPX) contains a much different mix of stocks than the Value Line Composite Index (VLCI). It contains about 2,000 companies compared with 1,626 in the VLCI. Also, the COMPX tends to be more volatile and has wider price swings than the VLCI.

Because of the higher volatility of the COMPX, I arbitrarily changed the filter percentage from 4 to 6 percent. Therefore, the first strategy tested set the weekly buy and sell signals at the 6 percent mark. This means that if the COMPX rises 6 percent from any previous weekly low, then a buy signal is generated on that Friday. Likewise, a 6 percent drop from any previous weekly high generates a sell signal on that Friday. On the sell signal, the strategy went short instead of going into cash. This is the same approach used for the VL4% and VL3% strategies.

The first test period tested the COMPX from its inception on February 5, 1971, through November 29, 2002. An initial investment of $100,000 was made on that beginning date, and no further funds were invested. After each trade, all the proceeds were reinvested in the next trade—either short or long. This strategy produced an annualized return of 18.77 percent and a profit of $15,209,502 compared with a $1,273,310 gain for buy-and-hold—thus producing an additional profit of $13,936,192 over buy-and-hold.

There were a total of 94 trades over the 32-year test period, averaging about 2.94 trades per year. However, only 54.3 percent of the trades were winners, but the ratio of average winners to losers was 2:1, and the profit factor was 2.37, both reasonable ratios. The long trades had a profit factor of 1.41 versus 2.78 for the short side. There were 59.6 percent profitable trades on the long side and 48.9 percent on the short side.

The only negative performance years were 1973 (–3.3 percent), 1984 (–0.1 percent), and 1994 (–11.8 percent). In 90 percent of the years tested, there was a profit. And there were gains in the bear market years of 1974 (34.2 percent), 1987 (11.3 percent), 2000 (9.8 percent), 2001 (39.5 percent), and 2002 (22.4 percent). This is what market timing is all about—protecting you from bear market devastation while making positive returns. This strategy was very successful in accomplishing this feat.

Figure 11-1 provides the equity curve for this strategy. As you can see, the slope of the curve is upward and to the right, with drops between trades 73 and 91 and then a resumption of the trend to new highs in November 2002. Figure 11-2 shows the buy and sell

signals (up and down arrows) of this strategy during the 2000–2002 bear market. You can see how well the signals caught the market turns in that volatile period.

**Original Test 2: Weekly Nasdaq 100 Index 6 Percent Strategy (NDX6%): 1971–2002**

Next, the Nasdaq 100 Index (NDX6%; contains only 100 nonfinancial stocks) strategy was tested over the 12-year period from November 11, 1990 (first date data were available), through November 29, 2002. This weekly strategy produced an annual return of 43.64 percent, with a net profit of $607,828, for a cumulative return of 6,078 percent. This compares with buy-and-hold’s cumulative return of 191.4 percent. Although only 47.17 percent of the 53 trades were profitable, the ratio of winning trades to losing trades was 2.41, and the profit factor was 2.15, making this strategy a winner. All the years produced positive returns, and the equity curve parallels the NC6% curve.

I was curious to see how the NDX6% did in comparison with the NC6% over the same time period and found that the NC6% earned $132,969 more in profit than the NDX6% strategy ($740,797 compared with $607,828). I also ran the actual VL4% daily strategy over the exact time period, and it came out with a profit of only $363,682, and the VL3% weekly had a profit of only $204,235.

**Original Test 3: Daily Nasdaq Composite Index 6 Percent Strategy (NC6%): 1971–2002**

Based on the exceptional results of the NC6% weekly strategy, I decided to run the same strategy on a daily basis for comparative purposes. This change produced a meager total profit of only $15,040 over the entire 13-year period. Profits started slowly, reached a nice peak, and then deteriorated. Therefore, using daily data instead of weekly data produces very poor results. Using the optimization feature of TradeStation, the optimal daily parameters for both the buy and sell signals turned out to be 11 percent, and that strategy produced a total profit of only $341,411 over the 13 years, still not a good showing. In conclusion, the NC6% daily strategy does not cut the mustard and should be discarded.

**Original Test 4: Daily Nasdaq 100 Index 6 Percent Strategy (NDX6%): 1971–2002**

I also tested the daily NDX6% data over the same period (1990–2002). The results were disastrous, with a loss of $88,806 for the entire period, or a –17.4 percent annual return. The optimal parameters turned out to be 12 percent for both the buy and sell sides, producing a gain of $75,436. This strategy is completely unstable because a 1 percentage point change drastically altered the results. Also, the equity curve is downward-sloping right from the start, a bad sign. In conclusion, this daily strategy also should be avoided.

**PART 2. LATEST TESTS: RESULTS THROUGH OCTOBER 2010**

Four more tests covering through 2010 are summarized here.

**Latest Test 5: Weekly Nasdaq Composite Index 6 Percent Strategy (NC6%): 1971–2010**

This latest test of the strategy added almost eight years of data from November 29, 2002, the last date in the prior test. These additional years resulted in an overall net profit of $24,772,616 from 1971 forward, for an annual rate of return of 20.7 percent. This compares very favorably with the previous annualized return of 18.77 percent and a profit of $15,209,502 for the prior test period. Overall, the return on capital was 247,726 percent compared with 2,201 percent for buy-and-hold, quite an astonishing difference.

There were a total of 126 trades over the 37 years and 9 months of the test period, averaging 3.15 trades per year. However, only 48.4 percent of the trades were winners, but the ratio of average winners to losers was 1.93:1, and the profit factor was 1.81, both reasonable ratios. The long trades had a profit factor of 2.03 versus only 1.52 for the short side. There were 54 percent profitable trades on the long side and 42.9 percent on the short side.

The only negative performance years since the original test were 2004 (–9.21 percent), 2007 (–5.23 percent), and 2010 (–5.9 percent). Overall, 84 percent of the years tested turned a profit. And there was a gain in the big bear market year of 2008 of 9.1 percent. This is what market timing is all about—protecting you from bear market devastation while making positive returns. Table 11-1 provides the performance statistics, and Table 11-2 shows the annual returns.

Looking at the equity curve in Figure 11-3, there was some volatility along the way and a few fair-sized drawdowns but, overall, an upward-sloping curve with top-notch performance.

**Latest Test 6: Weekly NDX 6 Percent Strategy, 1990–2010**

This test substituted the Nasdaq 100 Index (NDX6%) for the Nasdaq Composite Index. This weekly strategy produced an annual return of 25.0 percent, with a net profit of $753,685, for a cumulative return of 7,536.9 percent. This compares with buy-and-hold’s cumulative return of 449.5 percent. Although only 44 percent of the 89 trades were profitable, the ratio of winning trades to losing trades was 1.96, and the profit factor was 1.53, making this strategy

a winner. All the years but four produced positive returns, and the equity curve parallels the NC6% curve.

I also used TradeStation to run an optimization of the parameters and found that the 6 percent buy and sell signals actually provided one of the most profitable combinations. Only two strategies did better than the 6 percent strategy. The 5 percent off the low and 6 percent off the high strategy earned a profit of $770,317, and the 5 percent off the low and 8 percent off the high strategy earned a profit of $721,387.

I was curious to see how the NDX6% did in comparison with the Nasdaq Composite Index (NC6%) over the same time period and found that the NDX6% earned about $200,353 more in profit than the NC6% strategy ($954,038 compared with $753,685), with a 26.34 annual rate of return. I also ran the actual VL4% daily strategy over the exact 13-year time period, and it came out with a profit of only $363,682. The VL3% weekly, though, had the largest net profit of all at $1,325,253.

**Latest Test 7: Daily Nasdaq Composite Index 6 Percent Strategy (NC6%): 1990–2010**

Based on the exceptional results of the NC6% weekly strategy, I decided to run the same strategy on a daily basis for comparative purposes. This change produced a loss of $25,547 over the period. Profits started slowly, reached a nice peak, and then deteriorated. Therefore, using daily data instead of weekly data produces very poor results. In conclusion, the NC6% daily strategy does not cut the mustard and should be discarded.

**Latest Test 8: Daily Nasdaq 100 Index 6 Percent Strategy (NDX6%): 1990–2010**

I also tested the daily NDX6% data over the same time period. The results were disastrous, with a loss of $95,372 for the entire period, or a –12.1 percent annual return. The optimal parameters turned out to be 12 percent for both the buy and sell sides, producing a gain of $75,436. This daily strategy is completely unstable because a 1 percentage point change in either direction drastically altered the results. Also, the equity curve is downward-sloping right from the start, a bad sign. In conclusion, this daily strategy also should be avoided.

**COMPARISON OF THE NASDAQ WEEKLY WITH THE VL3% WEEKLY: 1992–2010**

Let’s compare the Nasdaq 6% weekly performance with the best performing Value Line strategy—VL3% weekly (Table 11-3).

Clearly, the VL3% weekly strategy is superior to both Nasdaq weekly strategies in eight of the nine metrics. This strategy had 111 trades during the test period compared with 85 and 73 for the Nasdaq strategies. This is really not a large difference in the number of trades over a 17-year time frame. Its Sharpe ratio also was the highest of all, which is a positive indication of its lower risk.

Insofar as the Nasdaq indexes are concerned, the weekly 6 percent signals are clearly superior to the daily 6 percent signals. The daily signals are much more frequent because of the volatility of their respective indexes. Moreover, both weekly strategies—NC6% and NDX6%—significantly beat the VL4% strategy’s performance but were inferior to the VL3% weekly performance.

I also backtested the Standard & Poor’s (S&P) 500 Index with various buy and sell filters, but the results were poor for both the weekly and daily signals because that index does not have the volatility and large percentage moves as does the Nasdaq. Based on the backtest results shown in this chapter, I recommend that you use either the NC6% (Nasdaq Composite Index) or the VL3% strategy for market timing because of their exceptional performance compared with buy-and-hold.

Regarding the use of these strategies for market timing, the same approach can be used as mentioned in the other strategy chapters using appropriate exchange-traded funds (ETFs) and proper stop-loss controls.