Top 20 Inefficient Stocks picked by the Chicago Quantum Net Score with 15 & 35 trading day results

Summary results: if you would have shorted the 20 stocks selected in equal amounts (5% of your investment in each stock) vs. shorting that same amount of the $SPY exchange traded fund, you would have made an extra 17.55% in 35 trading days, including dividends.

We include investment results through August 2, 2021 and August 30, 2021 (both market open) or 15 & 35 trading days.

Spoiler alert, this quantum algorithm-based model picked stocks that fell much faster than the S&P 500. We call our ‘inefficient stock’ picker our ‘down run’ and our ‘dogstar’ run as it looks for stocks that will fall quickly during any market disturbance.

The same calculation for 15 trading days yielded alpha, or excess return of 11.00% on your investment. In other words, the model kept working from trading day 16 — day 35. We usually forecast the model’s effectiveness at 10% of the measurement period, or 25 trading days, and this effect lasted an additional 10 trading days.

Results for 15 and 35 trading days — including dividends

In summary, an investment shorting these 20 stocks vs. shorting the $SPY would have earned you an extra 17.55% return, inclusive of dividends but exclusive of transaction costs and margin interest.

A few things about these results catch our attention.

  1. Very few of our ‘dogstar’ stocks rose during the period, despite a rise in the $SPY, or Standard & Poor 500 stock index. Even fewer (two or three) rose more than the $SPY during the evaluation period.
  2. The declines in some of these stocks were stunning, with five stocks falling more than 20%, and the largest decline at 60%.
  3. Some of the stocks fall during the first 15 trading days, then maintained their decline, while others continued to fall for the next 20 trading days. Five stocks rose during the second period.
  4. These stocks tend to be smaller capitalization stocks, although one is over $1B equity market capitalization.

These are interesting results, as they show a quantum algorithm can select stocks that should be avoided, or shorted by investors. We spent our first year in the business of building and running this algorithm finding stocks to buy and hold for ~25 trading days. Now we realize that both ends of the spectrum are useful and in at least this one public test, works well.

Here are the talking points on how our experiment and model work.

Presentation slide for our ‘down run’ model experiment

We typically pick stocks (in optimal portfolios) that are good to invest in. They have less risk and more return potential over the coming 25 trading days. We call these ‘allstars’ and they are the most efficient stocks. Efficient stocks have the lowest price volatility and highest BETA of any listed stocks over the measurement period (currently one year vs. S&P 500 index).

This article has our quantum algorithm picking stocks that are more likely to decline than rise, especially during market turbulence. These are the most inefficient stocks, or the stocks with the most risk (or daily price volatility) relative to the expected return (based on BETA). Think of these as stocks ‘on a pogo stick’ that go up and down (can be exhausting to watch) but generally have little direction.

These stocks were identified by our Chicago Quantum Net Score model based on market close, June 9, 2021 data (over the past 253 trading days). We use our standard risk model.

We tracked these stocks over 15 and 35 trading days. This ‘call’ is/was effective Monday morning, market open, July 12, 2021, and that is when we posted the first article draft.

These are the top 20 ‘dogstars’ or the most inefficient stocks out of 3,631 analyzed.

0 (GBR)1 (EQ)

2 (PRPO)

3 (PSHG)

4 (SCKT)

5 (KODK)

6 (SUNW)

7 (MRIN)

8 (EYES)

9 (BTX)

10 (EARS)

11 (AEMD)

12 (BSQR)

13 (CRIS)

14 (PPSI)

15 (GEVO)

16 (IGC’)

17 (RHE)

18 (WPG)

19 (REPX)

We expect these stocks to under-perform the $SPY (which the analysis was based on), or at least to have significant price movement without out-performing the $SPY over the next 25 trading days.

This list may be of benefit to day traders and swing traders who need volatility to make profits each day (up and down). It may also serve as a ‘short’ hedge to a ‘long’ investor in case the market falls. These should fall significantly faster than the overall market.

So, how did these stocks do? We notice two things (insight #1):

These stocks ‘live’ by abnormally high volumes. Who would normally want to trade an elderly care REIT (RHE) for 5.82M shares a day. Yesterday, this issue traded 0.16M shares. One share’s volume is down from 14.839M shares to 238K, a volume decline of 98.4%.

We have not tracked this week’s price performance, but can show you a snapshot of Thursday, July 15, 2021 close data. It is dismal. Four stocks fell > 10% on Thursday and only five were either unchanged or up. It is possible that these stocks will naturally fall in low volumes. We see this in other holdings.

To test the volume hypothesis, our Top 20 ‘Allstars’ picks had 16 volume declines out of 20, but the declines were smaller.

Persistence is a topic of interest from our followers. How long do your picks last? We took a look at our April 10, 2021 Top 20 ‘Dogstars’ and found seven that remain on this list, over two months later. Those stocks are BTX, CRIS, EQ, GBR, IGC, KODK, and MRIN. How should we understand them? Those are stocks with longer-term volatility that is independent of the overall market movement. We are not certain whether there are day/swing traders who target those stocks to profit from the short-term up/down patterns in those stocks. We do notice bursts of volatility over time in those stocks.

It is not certain whether these seven stocks will continue to ‘day’ trade actively, but they were in this pattern for over two months.

Here are the performance results after 15 trading days. As we hoped, these stocks declined relative to the S&P 500 ETF ($SPY). The $SPY rose 1.11% over the past 15 days, while the average return of these 20 stocks was -9.90%. In addition, 18 of 20 (or 90%) of stocks chosen under-performed the S&P 500 index ETF.

Put another way, if you would have ‘shorted’ these 20 stocks, you would have earned 11% before borrowing fees and interest costs in 15 trading days.

Market prices captured from Yahoo Finance on August 2, 2021 (market open).

Good luck in the markets today.

The author, Jeffrey Cohen, is the President of US Advanced Computing Infrastructure, Inc. Chicago Quantum is a service mark of US Advanced Computing Infrastructure, Inc. He wrote this article himself, and did not receive any compensation for this work.

For more information, please visit https://www.chicagoquantum.com or watch a free weekly video on YouTube at https://www.youtube.com/channel/UCVyHAGzpYkVsqZ3RM4oQspg

Disclosures:

This is not investment advice. Please do your own due diligence and research before investing. We do offer this ‘run’ or analysis as a fee-based service for clients. The costs are $150 if you provide ticker symbols, or between $500 and $1000 if we analyze complete US stock exchanges for you.

We have not had a position in any stock mentioned in this article in the past 4 weeks, nor do we intend to initiate a position in the next 4 weeks. Our disclaimer continues to be true, we have not initiated a position in any of these 20 stocks, nor do we intend to. We do not short stocks, BTW.

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Chicago Quantum

Chicago Quantum

Jeffrey Cohen, President, US Advanced Computing Infrastructure, Inc., & founder of Chicago Quantum (SM). We R&D and solve problems like portfolio optimization.