Is the IBD 50 Universe a Fatal Flaw in the QG Fund?

crime scene

crime sceneIf you have not read the backtesting analysis that Cesar Alvarez posted regarding the DTAYS Quantitative Growth Fund, you should absolutely check it out. What Cesar found was that running the QG Fund rules on a larger stock universe produced lackluster returns. Then, when he added a filter based on historical volatility, shit got real.

Cesar found that using a value of 40 for the maximum value of historical volatility would dramatically improve the returns of the the strategy. This is actually the opposite of what I would expect, and he references an interesting paper on historic volatility. I would have guessed that isolating the most volatile stocks would have produced better long-term results.

As I processed the impact of this new filter all week, I began to wonder if that meant that using the IBD 50 as the stock universe for the QG Fund was actually hurting the overall performance. The IBD 50 stocks tend to be exciting growth stocks, which are known for their volatility. If the stocks in the IBD 50 every weekend can’t pass Cesar’s volatility filter, is the entire QG Fund doomed to mediocre returns?

This Week’s QG Fund Scan

Here is the list of IBD 50 stocks that passed the 20 week breakout parameter this week. They are sorted by Rate of Change.

 weeklyscan-030914

As you can see, almost all of them have a 100-day historical volatility under 40. The only stocks that pass the breakout and ROC parameters with an HV over 40 are YY and GNRC. The rest of the stocks all look good.

I am taking this as a positive sign that the IBD 50 does a better job of isolating the best growth stocks than even I had given it credit for. Because I don’t need to add any new positions this weekend, I don’t have to make a decisions on whether or not to incorporate the HV filter just yet. However, it sure looks like a good idea at this point.

Overall Fund Performance

Because of my adjustment to the ATR stops, there were not exits triggered this week. There are three stocks that are currently trading below the 3-ATR stop but have not yet broken the 5-ATR stop. It will be interesting to see if they bounce back or finally trigger exits. So far, most of the stocks that have triggered the 3-ATR stop have gone on to also trigger the 5-ATR stop.

Despite hanging on to losers a bit longer, the QG Fund has remained in positive territory this week. The fund is currently worth a total net asset value of $100,597.98. That represents an overall return of 0.6% on the year, which means it is trailing all three of the major indexes. I believe this is primarily a result of the tight stops that I started with, and that giving the positions room to run should help to improve the performance moving forward.

Here is what the current holdings of the QG Fund look like:

qgfundholdings-030914