The iQ Triple Threat Short Model

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BUILT TO HEDGE AGAINST A MARKET FREE-FALL

The iQ Triple Threat Short Model  attempts to capture profits when the market declines, by holding stocks that are biased to the short side. The Model consists of three strategies (Valuation, Technical and Seasonal), each represented by five stocks with poor fundamentals and/or relative strength. Two of the three model strategies re-balance every 3 months while the remaining strategy re-balances monthly.

• Strategy One (based on Market Valuation, rebalanced every 2 months)

  • If the 3-month simple moving average of the S&P 500 Price-to-Earnings Ratio is above 20, the following steps are taken:

    • Start with the 1,000 largest domestically-traded stocks

    • Sort by Return on Equity, Plow-back Ratio and Operating Earnings Yield and keep the worst (lowest) 200

    • Sort by current Price to Value and compare to the stocks industry Price to Value and keep the worst (highest) 45

    • Sort by Long Term Debt to Asset Ratio and keep the worst (highest)15

    • Sort by price momentum and short sell the worst (lowest) 5

• Strategy Two (based on Market Technical Indicator, rebalanced monthly)

  • If the S&P 500 Index is below is 10 month simple moving average, the following steps are taken:

    • Start with the 1,250 largest domestically-traded stocks

    • Sort by Operating Earnings Yield and Price to Earnings Growth and keep the worst 250

    • Sort by Price to Earnings and Earnings Momentum and keep the worst 75

    • Sort by short-term Correlation to the S&P 500 and keep the lowest 15

    • Sort by Price Momentum and keep the worst (lowest) 5

• Strategy Three (based on Sell in May and Go Away, rebalanced every 2 months)

  • During the months of May through October, the following steps are taken:

    • Start with the l,250 largest domestically-traded stocks

    • Sort by Value and Momentum and select the worst (lowest) 250

    • Sort by Exponential Relative Strength and select the worst (lowest) 50

    • Sort by Price to Value and select the worst (highest) 10

    • Sort by Price Momentum and select the worst (lowest) 5

EACH STRATEGY REPRESENTS 1/3 OF THE MODEL. If a strategy is not in play, that portion of the Model invests in Treasury Bills or money market.

A Note About Short-Selling

Unlike long transactions, short selling involves significant costs, in addition to the usual trading commissions that have to be paid on stock transactions. These include (1) Margin interest – Margin interest can be a significant expense when trading stocks on margin, (2) Stock borrowing costs – Shares that are difficult to borrow – because of high short interest, limited float, or any other reason – have “hard-to-borrow” fees that can be quite substantial and (3) Dividends and other payments – The short seller is responsible for making dividend payments on the shorted stock to the entity from whom the stock has been borrowed.

Apart from these costs, risks associated with short selling include the following: (1) Risk of short squeezes and “buy-ins” – A stock with very high short interest may occasionally surge in price—typically when a positive development in the stock or broad market triggers massive short-covering, (2) Regulatory risks – Regulators may sometimes impose bans on short sales in a specific sector or even in the broad market to avoid panic and unwarranted selling pressure and (3) Contrary to long-term market trend – As the long-term trend of the market is upward, short selling is a contrarian strategy. Unlike a buy-and-hold strategy, it has to be opportunistic and well timed.