Model Portfolio wildmap:GRQ/M

The AlphaKing investment research project was started in 1999 to answer once and for all the age old question of what is the best way to risk ones capital in the stock market. Since I recognized the great importance and fantastic potential of investing in the stock market, and since I was unhappy with the choices offered by the investment community, I set about reinventing the investment wheel. Nine years into this quest, I believe the results and lessons learned are extremely meaningful. Indeed, I know of no better way to invest ones capital, and, trust me, I've looked everywhere. History - over the very long term - and a common sense approach to finding workable solutions to common investment problems - the stock market curve balls that seem to come from no-where - are how I approached the question of what works and what doesn't. While massive in scope, below is a brief description of the five step approach used to build the AlphaKing Research Project and portfolio strategies born from research.

Step 1: Winning Investment Elements

James O'Shaughnessy showed us how to, and the wisdom of, isolating and combining investment elements that had proven to outperform over the long term, with his high relative strength and low price to sales combination achieving a 24% annual return from 1954 to 1996 (source: "What Works on Wall Street.") Martin Zwieg showed us the power of FED interest rate policy had on the financial markets, also achieving a 24% annual return from 1966 through 1988 (source: "Winning on Wall Street.") When I combined the James O'Shaughnessy's portfolio and Martin Zweig's Interest rate strategy it returned a spectacular 28% per year.

So three proven investment elements - high relative strength, low prices to sales, and FED interest rate policy - worked better than one or two alone. The question became, what other elements were out there, and would returns of five such successful elements combined be higher than the Shaughnessy/Zweig three? And if five is better, what would happen if you isolated 10 such successful elements and combined them? That was the primary starting goal of the AlphaKing investment research project.

Step 2:Winning Chart Patterns

The results of those Winning Investment Elements tests were very promising, proving basic combinations of winning fundamental elements not only had outperformed historically, but also in the up and down years of the stock market bubble boom and bust cycle when tracked in real-time. The question then became, can performance be improved upon by adding non-fundamentally orientated elements? In 1999, when I was putting the fundamental element test portfolios together, I began adding specific chart patterns to the mix, to see if fundamentals and targeted chart patterns would do better than fundamentals alone. I used a quantitative scoring system to analyse and quantify the fundamental elements, and instead of choosing the highest scoring stock fundamentally, these Winning Chart Pattern test strategies took the highest scoring stocks that also had a specific chart pattern. Thus, all stocks had great fundamentals (as defined in Step 1,) and the only addition was a specific chart pattern element. The question was, do certain chart patterns have out-performance value? The answer was a resounding Yes!

Step 3: Beta: friend or foe?

With a combination of winning fundamental elements working better when used in conjunction with favorable chart patterns, I looked to see if returns could be improved by the addition of other investment elements. One obvious way was to check to see how trading higher beta stocks effected performance. The results where unequivocal, with an even distribution of performance based on the beta make-up of the stocks held in each portfolio, with the S&P500 type stocks out-performing Dow Industrial type stocks, with the more aggressive NASDAQ type of stock out-performing the S&P500 stocks, while the most agressive Rusell 2000 small cap equity out-performed all. Thus, beta leverage, when combined with a combination of favorable fundamental elements and winning chart patterns, does significantly enhance performance, proving that beta is a trader's friend, and not a foe to be feared.

Step 4: Winning Money Management Techniques

Leverage in the forms of beta has worked well - significantly improving performance of the great fundamantals/great chart pattern combination - though the earlier bear market years of 2001 and 2002 showed such an approach comes with some significant down-side volatility on the bear swoons. Please note that these early tests of the AlphaKing portfolios were designed to answer the question of how specific investment elements effected performance and volatility, and were 100% invested at all times, with no adjustments made for the action of the stock market. These were simple tests to see how specific elements reacted to the ups and downs of the stock market when pitted in head to head competition against other known investment elements, as well as other investment strategies, to see which investment elements worked, which didn't, and which combination of investment elements worked the best overall.

With a collection of winning fundamental elements, and winning chart patterns, proving to achieve and maintain significant out-performance, the question became: what would happen to returns if I added an active defense designed to prevent portfolio losses and downside volatility during stock specific, and general stock market bear corrective phases? The recent decade of bear misery, which has potential to get a great deal worse before things get significantly better, highlights the great need for such an active defense. It took many years of testing using proprietary software that I had designed to my specification to come up with the answer, though, Boy, was it worth the wait! The findings not only allowed the spectacular returns generated during the great bull cycles to accumulate unimpeded, it also locked in those gains in the very early stages of bear corrective phases, allowing a persistent upward stairstep pattern of returns. Indeed, when shorting stocks during the bear corrective phases was added, returns simply skyrocketed!

Step 5: Stock Market Trends: friend or foe?

So far the AlphaKing Research project had uncovered that seeking stocks with great fundamentals, when used in conjunction with specific targeted chart patterns, along with targeted beta leverage, while using active defensive and offensive money management techniques, provided the most investment return with the least amount of volatility than any individual investment element alone.Indeed, they provided greater return than any other investment strategy I was aware of. The question then became: how else could performance be improved upon? One area that seemed to offer promise was to adjust trades directly in-line with the overall stock market trend, rather than leaving individual stocks in the portfolio to fend for themselves. The answer was spectacular, and perhaps the most important finding of the AK research project todate. Every test showed that it was foolish to hold stocks - no matter how great they were fundamentlally, or how well they were acting - when the stock market was in bear sell mode. I tested this every which way possible, going back as far as stock market data was available, and results were always the same. Marty Zwieg had it spot on when he said the trend is your friend.

Conclusion

Great fundamentals, when used in conjunction with specific targeted chart patterns, along with targeted beta leverage, while using active defensive and offensive money management techniques on individual stocks once entered, while timing portfolio entry and exit based on stock market trends has proven to provide maximum returns with the least amount of volatility in the AlphaKing Research Project so far todate. I have combined all of these features into a single indicator I call the AlphaKing Trading Indicator. I use all of these winning investment elements, along with the AK Trading indicator, to run the all-weather, bull or bear I don't care, GrQ/25 portfolio, available for managed accounts at Marketocracy via their mFolio account option. I believe the GrQ/25 strategy is a giant step forward for the investment world, and my only regret is such a robust strategy wasn't available when I started investing.

Kevin Wilde, Chief Trading Strategist, Alphaking.com

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