Using delisted series from Norgate Data, we analyzed the impact of Dow-30 stocks on an equity long-short trend-following strategy for the S&P 100 constituents.
Suppose we want to determine whether, excluding Dow-30 stocks, a long-short equity trend-following system with the S&P 100 index constituents would have historically performed better. We need to use historical data with current and past constituents; otherwise, our results will suffer from survivorship bias. Norgate Data offers such series and ease of integration with popular backtesting platforms. Here we use Amibroker.
The strategy we consider is simple: we buy stocks from the index when the price exceeds the 12-month average and sell short stocks when the price falls below the 12-month average. Additionally, we cover positions when a stock is delisted. The strategy can hold open up to 10 long stocks and up to two short stocks, but the maximum open positions cannot exceed 10. As a result, we need a ranking function to decide which stocks to trade in the event that there are more signals than the maximum allowed open positions. In the examples below, we used the 252-day rate of change for each stock. Because we calculated the entry and exit rules within the monthly timeframe, we rebalanced the trading signals at the start of each new month. We calculated all performance metrics in the daily timeframe.
All backtests were based on daily data from 01/02/1990 to 09/25/2024. We did not include any commission or slippage because the objective was to study the relative impact of Dow-30 stocks on performance rather than develop a trading strategy. Note that we do not recommend the strategy; it’s main purpose was to analyze the impact of Dow-30 stocks on historical performance.
Case 1. Strategy performance with S&P 100 index constituents and delisted series
The annualized return is 12.8%; the maximum drawdown is 44.6%; and the Sharpe ratio is 0.69. Next, we excluded Dow-30 stocks from the backtest.
Case 2. Strategy performance with S&P 100 index constituents and delisted series excluding Dow-30 stocks
After excluding Dow-30 stocks, we noticed that performance during the GFC bear market in 2008 and subsequent two years deteriorated. The annualized return fell to 7.5%, the maximum drawdown increased to 51.7%, and the Sharpe ratio dropped to 0.43.
What if we traded only Dow-30 stocks instead of S&P 100 stocks?
Case 3. Strategy performance withDow-30 index constituents and delisted series
The performance of the strategy significantly deteriorated during the dot-com bear market. The annualized return was 7.3%; the maximum drawdown was 46.9%; and the Sharpe ratio was 0.54.
Conclusion
In this example of a limited study using a simple trend-following strategy, we concluded that including Dow-30 stocks contributed to a significant improvement in the strategy’s performance during the GFC bear market and subsequent two years. At the same time, better alternatives from the S&P 100 index universe compensated for the negative performance of the Dow-30 stocks during the dot-com bear market.
Therefore, high liquidity, large-cap Dow-30 stocks might serve an important role during bear markets in the case of long-short equity. Although we analyzed the results of just one strategy, we believe this generalization makes sense.
Disclaimer: No part of the analysis in this blog constitutes a trade recommendation or actionable content. The past performance of any trading system or methodology is not necessarily indicative of future results. Read the full disclaimer here.
Charting and backtesting program: Amibroker. Data provider: Norgate Data
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