A Monthly RS-IBD Model

by Robert Sheard
(TMF Sheard)

LEXINGTON, KY. (August 14, 1998) -- In yesterday's column, I put the Keystone Growth model to a test based on monthly updates rather than the more typical annual cycle. And at least for the very limited test of 1998, it's been extremely powerful. Today I'll put the IBD Relative Strength model through the same paces.

Each month I calculated the returns for the top five stocks, re-weighting equally all five positions at the beginning of each month (the same method I used for testing Unemotional Growth). Here's the month-by-month detail:

 
           January 
   37.63%  Best Buy Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BBY)") else Response.Write("(NYSE: BBY)") end if %> 
   -0.22%  Safeskin <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SFSK)") else Response.Write("(Nasdaq: SFSK)") end if %> 
    0.00%  United Stationers <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: USTR)") else Response.Write("(Nasdaq: USTR)") end if %> 
  -10.99%  Allied Waste <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AWIN)") else Response.Write("(Nasdaq: AWIN)") end if %> 
   12.40%  Standard Pacific <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SPF)") else Response.Write("(NYSE: SPF)") end if %> 
  
    7.76%  Total Return 
  
           February 
   17.49%  Best Buy Co. 
   40.58%  Dell Computer <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DELL)") else Response.Write("(Nasdaq: DELL)") end if %> 
   13.38%  Alaska Air Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ALK)") else Response.Write("(NYSE: ALK)") end if %> 
   16.45%  Ethan Allen <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ETH)") else Response.Write("(NYSE: ETH)") end if %> 
    8.39%  Safeskin 
  
   19.26%  Total Return 
  
  
           March 
   11.95%  Best Buy Co. 
   -3.13%  Dell Computer 
   20.37%  Safeskin 
    3.24%  United Stationers 
   12.68%  America Online <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AOL)") else Response.Write("(NYSE: AOL)") end if %> 
  
    9.02%  Total Return 
  
  
           April 
    5.24%  Best Buy Co. 
   19.19%  Dell Computer 
  -15.10%  Ethan Allen 
   -3.55%  Safeskin 
    2.12%  United Stationers 
  
    1.58%  Total Return 
  
  
           May 
   -7.12%  Best Buy Co. 
    3.90%  Capital One Financial <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: COF)") else Response.Write("(NYSE: COF)") end if %> 
    2.09%  Dell Computer 
    3.90%  America Online 
   -1.75%  Safeskin 
  
    0.20%  Total Return 
  
  
           June 
   10.73%  Best Buy Co. 
   24.42%  Capital One Financial 
   27.23%  America Online 
   12.59%  Dell Computer 
   17.50%  Safeskin 
  
   18.49%  Total Return  
  
  
           July 
   10.38%  America Online 
   29.41%  Best Buy Co. 
   17.04%  Dell Computer 
   -6.54%  Capital One Financial 
   -3.25%  The Gap <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GPS)") else Response.Write("(NYSE: GPS)") end if %> 
  
    9.41%  Total Return 
  
  
           August 
   -9.13%  America Online 
   12.30%  Best Buy Co. 
   -1.96%  Dell Computer 
  -13.18%  Nokia ADR <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NOK.A)") else Response.Write("(NYSE: NOK.A)") end if %> 
   -1.67%  Capital One Financial 
  
   -2.73%  Total Return

Through yesterday, such a plan has an awesome year-to-date return of 79.83%, or an annualized rate of 160.19%. The Standard & Poor's 500 Index, as a comparison, is up less than 11% on the year.

Ironically, this approach has generated fewer trades than the equivalent Keystone model I discussed yesterday. So far, the model has required only ten stock switches (twenty trades), which gives one approximately thirty to thirty-five trades a year. With stocks like Best Buy, Dell, and America Online camping out atop the rankings, there just hasn't been much wholesale replacement. Keep in mind, though, that those twenty trades do not accomplish any re-balancing of positions, which my returns do account for. That's simply the number of replacement trades required so far.

And as with the Keystone model, the big concern is whether such market outperformance is a one-year wonder or a sustainable pattern (even if not at such dramatic levels). In my original testing leading up to the development of Unemotional Growth, this model did not perform all that well over the five years or so I sampled. And throw in high tax rates and it may or may not give one a benefit over annual holding models. We'll keep watching.

Check out the latest file updates for the Workshop:
New Rankings | 1998 Returns | New Database

[Robert Sheard is the author of the The Unemotional Investor (Simon & Schuster, 1998) available now at Amazon.com and your local bookseller.]