One way of measuring long/short strategy efficiency is to monitor short gains on the days the market rallies and long gains on the days the market falls sharply.
This is an example below with DLPAL LS long/short signals for S&P 500 stocks, generated after the close of Friday, June 5, 2020. We select the top 5/bottom 5 stocks based on a rank function equal to directional bias times its significance.
The output also shows returns for each stock from open to close of the day and previous close to close of the day on Monday, June 8, 2020. The S&P 500 index rose 1.2% and the long/short average return from open to close was 1.38%.
Eight stocks had gains and two stocks had losses. Three of the five short stocks had profits from open to close of the day: SWKS, MLM and TPR.
In order to assess the efficiency of the long/short strategy on the particular day, it would be good to know whether the short gains were realized due to stocks going up but retreating from the open while staying positive for the day or due to stocks closing below the previous close. This latter case indicates a better signal.
SWKS
SWKS opened higher but then it closed 1% down on the day. Therefore, this was a significant signal.
MLM
MLM opened higher but closed down 1.5% for the day. This was also a significant signal.
TPR
TPR closed below the open but higher from the previous close. This was not a significant signal and the outcome was probably random.
Two out of the three short signals with profits were significant on a day the stock market rallied. This is a good result.
A cumulative indicator may be developed based on the above rationale, expressed as percentage of long and short, to evaluate the significance of signals.
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For more information about DLPAL LS click here.
The program manual can be found here.
