2006 game plan: putting it all together--SPX's good and bad

Green line: a blended portfolio long: best stocks, short: worst stocks. Perfect hindsight yielded 60% return with 0.27 beta.

Prior posts reviewed the performance of the best and worst stocks of the SPX. The above chart summarizes the good and bad of the SPX in 2005. Though the good and bad stocks of the SPX performed similarly in the 4th quarter of 2004, in January the good immediately outperformed the bad, as presumably portfolio managers re-positioned for the new year. Assuming that the observations above continues again the 2006 working hypothesis should be:

1. short stocks that a) have poor relative strength and b) break below its Nov-Dec low;
2. buy stocks that a) have strong relative strength and b) break above its Nov-Dec high (with appropriate stops of course).

How will this hypothesis hold up? Stay tuned.