Awhile ago a wrote a post regarding whether or not RSI looked like a meaningful indicator. After writing that, I decided to do an experiment to see if I could come up with a strategy based on the relative strength index (RSI) of a stock.
First off, there are many ways to calculate RSI – short term, long term mid term, but I decided to look at the short term 10 day moving average RSI – for now particular reason other than I had that data available. The strategy I used was when a stock goes above 70 on the RSI sell a call or buy a put with the assumption that it is likely to perform poorly going forward, and when the RSI falls below 30 buy a call assuming it will outperform the market going forward.
I set up a process that each week, my stock model sends me an email with candidate stocks where the RSI is above 70 or below 30, and I would pick from that list likely candidates and record it in a spreadsheet. An important point: Anytime I try out a new strategy I do it via ‘paper trades’ first – instead of actually making the trade, I just write it down or put it in a spreadsheet. I figure if I stumble across a winning strategy, it will work for years to come so I can afford to wait awhile before I actually put it in place. Since I tend to stumble across more losing strategies than winning strategies, this practice has served me well over the years.
The results? See below:
In a word.. Ouch! Had I actually pursued this strategy it would of been brutal. Note that for calls I sold (those were hypothetical covered calls), my profit calculations include the opportunity cost. For instance, for the June 23rd sell of Costco calls I would of collected $1000+, but at time of expiration the stock was $884 over the strike price + call price, so I missed out on that (assuming I had the stock to begin with).
For now, I have set this strategy aside, and am going to think about what I learned for a few months. Maybe I stumbled upon a successful strategy by doing the opposite of what I originally hypothesized. Perhaps anytime a stock goes above the 10 day RSI, you should buy, and when it goes below sell a call on it. Or maybe the time premium of options just makes it too hard to be successful. I don’t know. What I did reinforce for sure is the value of practicing via paper trades before committing to a strategy.
I am OK with this seemingly odd correlation, because it is a maker or work boots used by oil field workers. This influence is often called out in the earnings call, so its likely a valid coorelation.
A slight coorelation, but if on a 4 month rolling average basis RCKY performs worse than the index, the next month shows a slight outperformance.
Again, a slight coorelation, but RCKY is a Microcap stock, so it does tend to catch up if underperforming for a 4 month period.
No big box stores, every morning the Boulangeries are full of locals buying bread, every town seems to have a butcher to buy meat, and when the market comes to town the townspeople come out. It seems an anachronism in this day and age, but the model appears to be working. However, more towns are seeing more supermarket style stores in them, and the crowds in there seem younger, so maybe this style of retail will give way to the central supermarket. I think that would be a shame.