Picking stocks can be an overwhelming affair... there’s just so many ways to skin this cat.
You can let fundamentals be your guide... weighing up profits to losses and assets to liabilities. Done properly, this produces a detailed picture view of a firm’s strengths, weaknesses and prospects for the future. Then we have technicals... the analysis of price charts. Sceptics liken it to reading tea leaves but as a former practitioner (of technical analysis, not reading tea leaves!) I can attest to its successes. Over long and short time horizons, it offers a powerful read of sentiment on the trading floor.
And that’s just the tip of the iceberg.
From economics to statistics to inter-market analysis, it’s tough to know where to start when looking for investments.
That where we come in and shine our light.
You name it, Fleet Street Research covers it. Think of us as your very own troop of number crunchers. Our team of boffins are here to give you the final word on all the big issues. Plus, we give you snippets of our proprietary investment indicators.
We’re not afraid to roll up our sleeves and plough through the numbers to bring you the best in new research. And, we find time and time again that the best advice is often the simplest.
Believe it or not, we’ve uncovered a buy and sell routine so simple a caveman could use it. But despite its plain appearance this technique has actually averaged a double digit profit in four of the last five years.
What is this trick you ask?
We call it the FTSE Promotion Premium and it may just be the best strategy that you’ve never heard of.
What is the FTSE Promotion?
The FTSE 100 index of leading shares reshuffles its pack four times a year. At each interval a few stocks, those whose market value has tumbled, get relegated to the mid cap index. In exchange, a few mid cap stocks get promoted to the FTSE 100.
The Promotion Premium works like so:
- Mark a place in your diary, out for quarterly reshuffles. These happen in the first week of March, June, September and December.
- Buy stocks that are promoted.
- Sell stocks at beginning of next reshuffle.
- Repeat.
And how has it fared?
2007: -21%
2006: 16%
2005: 11%
2004: 10%
2003: 26%
Average performance: 8.4% 1
It couldn’t be simpler.
But still, this strategy outpaced what you’d pick up in the bank. Adjusted for bull-market years, where this approach performs best, it returns an average of 16%2 , outstripping the performance of the FTSE 100 by nearly 6%.
Looking at our exclusive research you can see that this is a pretty handy tool.
How’s it faring so far in 2008? Well for the first quarter, running from March 8th to June 7th turned a 5% profit. The second quarter has started shakily as the FTSE 100 balances on the edge of bear market territory, but there is still over two months to go.
What’s behind this phenomenon?
Index reshuffles are big business.
When companies get promoted, they get bought. This isn’t anything to do with the FPP, but part and parcel of the way the investment management industry works.
There are two types of investment funds, active funds and passive funds.
An active fund buys particular stocks to try and outperform the market. Passive funds simply try to mirror the performance of the market, or ‘track the index,’ as it is known.
By far, the largest pool of index trackers revolves around the FTSE 100. This means that every time a few firms get promoted into the top tier, those companies get heavily bought by the growing number of index funds.
When stocks are added to an index, funds have to buy these shares, this way the funds still accurately reflect the ongoing performance of the market.
As a result, promoted shares go up in value as a response to all this buying activity. This is a common pattern in the share prices of candidates for change in the FTSE indices, and the short-term trading opportunities attract speculators to those stocks.
There’s a mountain of academic and investment literature on this strategy. It pours over the best times to get in and the best times to get out, the consideration of volume and all sorts of other convoluted issues.
The hedge funds call this strategy ‘index rebalancing arbitrage’... we just call it easy money.
The only raincloud on this profit parade, and unfortunately it is a big one, is recent performance... judging by the most recent returns, the ‘hedgies’ look to have all clocked onto this phenomenon and taken what advantage there is to be had.
Once enough people are wise to the game, those ‘in-the-know’ tend to move the goalposts. Our goal at Fleet Street Research is to counter this by keeping you in the loop of what works, when it works and how it works.
Now is not the opportune time but this is not the last you will hear of the FTSE Promotion Premium.
Theo Casey
1 Includes dividend payments
2 All figures taken from Bloomberg Professional Service and Google Finance. Subject to survivorship bias.
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