Third Quarter 2015 - Fishbone Model Results

The launch of the Fishbone investment strategy has been a successful one. For the third quarter of 2015 the model returned 15.5% versus a loss of 9.4% for the S&P 500. For the month July we held a slightly bullish bias as the market trended. In August we decided to increase portfolio protection as written in the blog on August 9: Time to Consider Portfolio Protection.

The momentum figures were deteriorating but the shorter-term sentiment indicators were not reflecting this weakness. This divergence raised red flags for us and was the impetuous for our taking a bearish stance. The fact that the market sold off aggressively two weeks later is a function of strategic planning but luck is a wonderful thing. We don’t expect the timing of this model to be the norm. It assists us in planning for potential outcomes and investing accordingly.

As the selloff accelerated we formulated a strategy to attempt to profit from what we envisioned as an oversold condition. We positioned ourselves based on our modeling and made a significant portion of our gains at the height of the August volatility. Our strategies were outlined in How We Position Ourselves From Here and We Expect Additional Market Weakness Going Forward.

We participated in the market rally off its August lows and held until our range of levels provided were reached. It just so happened to coincide with the Fed interest rate decision and we closed our long positions and decided to take a bearish bias into the end of the quarter.

The chart below outlines the Fishbone model performance against the benchmarks assigned to it through our trading account held at Interactive Brokers. It compares our returns to that of the S&P 500 (SPX), the Vanguard Total World Index (VT) and iShares MSCI EAFE Index (EFA). For the quarter the Fishbone model averaged 4.8% return per month versus -3.2% for the S&P 500.

The chart below represents the cumulative return of the Fishbone model versus the selected benchmarks. The cumulative return for the Fishbone model was 15.1% versus -9.4% for the S&P 500.

The chart below shows the Value Added Monthly Index (VAMI) for the Fishbone model versus its benchmarks. Interactive Brokers defines the VAMI as, “A statistical figure that tracks the daily/monthly/quarterly performance of a hypothetical $1000 investment.” The VAMI for the Fishbone model is a superior 1151.32 compared to 906.29 for the S&P 500. The standard deviation for the Fishbone model was 2.66% for the quarter which is largely in-line with the comparable benchmarks. Superior risk-adjusted returns result in a Sharpe Ratio of 6.3 for the Fishbone model. For the three months that it has been actively launched it has not had a negative month so we cannot calculate the maximum drawdown figures or the Sortino and Calmar Ratios.  

The following graphic also shows our monthly distribution of returns.

The chart below shows the Fishbone model action indicator for the S&P 500 for 2015. This model can be applied to many other stocks and ETF’s. We usually target only those companies that reside in the S&P 500. For additional information on how the Fishbone model works please click here.

Joseph S. Kalinowski, CFA

Additional Reading

What is the Fishbone Investment Model?

 

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This analysis should not be considered investment advice and may not be suitable for the readers’ portfolio. This analysis has been written without consideration to the readers’ risk and return profile nor has the readers’ liquidity needs, time horizon, tax circumstances or unique preferences been taken into account. Any purchase or sale activity in any securities or other instrument should be based upon the readers’ own analysis and conclusions. Past performance is not indicative of future results.