July 11th, 2014

Lists of “Value” Stocks Often Miss Target

image“After 5 years of a bull market, the only place left to invest is in value names”
“The best protection in this volatile market are value stocks”

But how reliable are these sorts of claims?  Those promoting the approach offer lists of stocks that are considered undervalued typically when they meet such financial criteria as low price/sales, low price/book value, or high, stable and growing dividends. However, they rarely attach timeframes or price targets.

So I decided to do some “back testing”.  By searching the term “value stock lists”, I gathered a small random sample of such lists published in 2012-13; stocks in these lists met one or more of criteria that qualifies them as “value stocks” at the time.  I then compared their stock price on the publication date with that of twelve months later; as a benchmark, those changes were compared with against the S&P 500 change over the same period.  These were selected at random and space limitations prevented including more, I suspect others would show similar results:

  • MagicDiligence.com: “Top 10 Dividend Yields, Lowest P/S, and Lowest P/B Stocks” – 1/5/2012: “Every so often, MagicDiligence compiles a list of Magic Formula® Investing stocks sorted by their dividend yield, price-to-sales ratio, and price-to-book ratio for investors that like to use those metrics. The result produces a list of attractive value stocks for additional research.” The top 10 in each of the three metrics were:
    Value MagicDiligence
  • Valueline: “Value Line’s 6 Safe Dividend Stocks” - 11/22/12 : “Value Line is an independent investment research and analysis company that has developed a safety ranking methodology which focuses on the long-term stability of company’s stock price and financial standing.  The fund invests in companies that carry Value Line’s ratings of 1 and 2, representing the most stable and financially-sound dividend-paying companies and higher-than-average dividend yield, as compared to the indicated dividend yield of the S&P 500 Composite Stock Price Index.”  The top picks were:Value - Valueline
  • Forbes: “Return To Value Stocks: Cisco And Three Others To Buy” – 10/7/13 : “At ValuEngine.com we show that 77% of all stocks are overvalued, 40.8% by 20% or more. 15 of 16 sectors are overvalued 13 by double-digit percentages, seven by more than 20%.  This week there are four Dow components on this week’s ValuTrader watch list.”  The list included:Value - Fobes
  • SeekingAlpha: “12 Large-Cap Stocks Selling Below Book Value” : “Price-to-book ratio is used to compare a stock’s market value to its book value and it is calculated by dividing the stock price by the book value per share. The higher the price-to-book ratio, the higher the premium the market is willing to pay for the company above its assets. A low price-to-book ratio may signal a good investment opportunity, as book value is an accounting number and rarely represents the true value of the company.”Value - SeekingAlpha
  • 24/7 Wall St.: “Value Search: Dirt Cheap Tech Stocks” – 7/10/10:…” when you get companies that trade under 10-times believable forward earnings expectations and which have low multiples of sales and even a low implied book value, this is where value investors tend to focus.  Whether a turnaround comes or not might not even matter if stocks get “cheap enough” for the value investors.”Value - 24x7

The hit rate (performance exceeding that of the benchmark S&P 500 Index) of the 60 stocks for this random sample of five lists was 50%, not much better than randomly selecting 60 stocks from any or combination of the major Indexes.

We’re continually subjected to academic studies purporting to show the failure of technical analysis.  For example, Stockopedia had a piece entitled “Technical Analysis? 5 Reasons To be Sceptical about Charting in which they quoted an academic study that back tested the effectiveness of “5000 technical trading rules” grouped into four categories:

  • Filter Rules – prices move of various percentages.
  • Moving Average Rules – prices move above or below a long moving average
  • Channel Break-outs – prices move above or below a channel (trading range)
  • Support or Resistance Rules – prices move a certain percentage above or below a maximum or minimum price a number of periods back.

;The study concluded that “no evidence that the profits to the technical trading rules we consider are greater than those that might be expected due to random data variation.”

I’ve now turn the tables and measured the effectiveness of some fundamental trading rules.  Although perhaps subject to criticism for being insufficiently rigorous, I convinces me that there is “no evidence that the profits to the fundamental trading rules are greater than those that might be expected due to random data variation“.

August 8th, 2013

Portfolio Management: Part 4 – “Preservation” or “Growth”? Why Not Have Both

Asset Allocations

 

The debate about portfolio management centers on whether one needs to “predict” or “react” for good performance.  The professionals settle that for themselves by claiming that since no one can predict the future, the best anyone can do is to diversify into many different asset classes (i.e., equities, fixed income, commodities, currencies, domestic and foreign, income and growth, large and small capitalization).  Economists like John Mauldin fall into this camp.  He and other perma-bear economists have been seeing top for most of the last 10-15% of the market’s move.  Mauldin recently wrote:

“This is a terrific time to take some profits and diversify away from the growth-oriented risk factors that dominate most investors’ portfolios. Instead of concentrating risk in one asset class or one country, investors can boost returns and achieve more balance by taking a global view, by broadening the mix of core asset classes, and by weighting those return streams to achieve balance across potential economic outcomes (rather than trying to predict the future) …..

 

broadening this mix of core assets – so that you have some element of your portfolio that responds positively to every potential economic season – and managing the relative allocations to each economic scenario may be your biggest opportunity to add value in the investing process.  You have a lot to gain from diversifying as broadly as possible, eliminating unrewarded costs, reducing your reliance on equity risk, and reining in the emotional mistakes that often lead investors to dramatically underperform.”

What these portfolio managers don’t understand is that one doesn’t necessarily have to predict where the market will be next week, next month or next year.  They claim that the only way to protect a portfolio against uncertainty when funds need to be withdrawn is to allocate assets among different classes based on today’s predictions and then rebalance periodically.  But an alternative approach is to aim for the highest returns while at the same time reacting and responding to abnormal and unexpected volatility immediately after it occurs.

In the previous article about the “Ultimate Buy-and-Hold Strategy” , the basic premise was that by assembling a specific mix of asset classes for a very long time (actually, 42 years) you would have reduced the volatility of a portfolio without significantly and not reduced its return.  However, nearly everyone would agree that, looking back with the benefit of hindsight, it would have been wonderful to have had the foresight to assemble a portfolio in 1970 and hold it until today, or 42 years.  But would that same approach produce the best results if you were to assemble the portfolio today, at the end of a 13-year secular Bear Market?  Thirteen years hence would we be better off if we assumed today that the next 13 years would be more similar to the 1982-2000 Bull Market than either the secular Bear Markets of the 1970′s and 2000′s?

We can’t predict the future but the odds are that the next 13 years won’t be even similar to the past 13 years.  Using the same data as Merriman’s, the “Buy-and-Hold” portfolio management approach delivers much different results had the portfolio started at different points and had different end dates?  As an alternative test, four hypothetical $200,000 portfolios were split into two parts, 60% in equities and 40% in fixed income, and rebalanced annually.  The annual returns since 1970 for equities and fixed income securities came from the St. Louis Federal Reserve Bank.  The four test portfolios were:

  • 1970-2012 (the 42 year “buy-and-hold” base case),
  • 1982-1999 (the last 17 year secular bull market),
  • 2000-2012 (the current 12-year secular bear market) and
  • 1970-1982 (the previous 12-year secular bear market).

There’s no question that, regardless of when the Portfolio was originally created, the 60/40 blended portfolio would always have been less volatile (as measured by the standard deviation of the portfolio’s annual change in value) than a 100% stock portfolio but more volatile than a 100% fixed income portfolio (click on images to enlarge).

Portfolio 1970-2012
Portfolio 1970-1982
Portfolio 2000-2012
Portfolio 1982-1999 But what is also true is that at end of the holding period, your portfolio would be worth more if you had been 100% in stocks than if you had blended in a percentage of fixed income …. sometimes much more.  As a matter of fact, if you had started your portfolio at the beginning of 1982 and held it somewhere close to the top of the Secular Bull Market when the Tech Bubble burst, then your portfolio would have delivered an average annual 19.12% and wound up worth 166% of the 60/40% mix and 388% of a fixed income only portfolio.  [Due to the spectacular decline in interest rates since the crash of the real estate bubble in 1977 - a trend that was as unprecedented as the secular bull market of the 1980-90's - a fixed income portfolio would have out-performed an equity portfolio by 152% but neither delivered much more than 7.2% average annual return for the 12 years.]

As I see it, you shouldn’t have to pick a single goal.  Are you wealthy enough to focus on “preservation” rather than “growth” in your portfolio?  Are you so preoccupied in other matters than you can’t react to changes in trend of any particular asset class; remember, both the Tech Bubble burst and the Financial Crisis evolved over 6 months.  Catch up on the major economic and business news once a week, make only incremental adjustments (i.e., not more than 10% of the portfolio at each decision) and you’ll be able to manage your portfolio.  You don’t need to predict the future you only need to review, react and respond as changes demand.  Portfolio management shouldn’t be day-trading but it can be more than just a “buy-and-hold” portfolio.  You can generate growth as well as preserve your capital.

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February 22nd, 2013

Postmortem on Stock Sales

imageThe jarring correction over the past couple of days understandably sent shivers down my back.  Should I start selling some of my winners in order to lock in those gains or just steel my nerves and hold on until this passes?  I like most of my positions (currently over 70 stocks in the Model Portfolio) and the market is close to testing the strength of its momentum as it approaches what I have labeled the “Crunch Zone”, the area between the 2001 and 2007 all-time highs.  Shouldn’t I do nothing and just wait?  There is nothing in the technicals other than the fact of the approach to the all-time high to indicate that this is only another correction that the market has successfully weathered during the current bull market run since the 2009 bottom.

All of us are continually caught on the horns of this dilemma but even more so when the market is correcting: 1) hold on and run the risk of more significant losses or 2) sell and run the risk of unwinding some excellent positions.  We usually evaluate our success as investors is to see whether our total returns (dividends and appreciation) are respectable.  If we’re honest, we compare those returns against a benchmark [I use the S&P 500 Index] to see whether our efforts have produced returns in excess of what we would have earned in an Index Fund or ETF.  What we don’t do often enough, however, is move beyond our current positions and analyze the previous trading that got us to where we are today.

  • When did we sell stocks?
  • How have the stocks that we did sell (often in panic in response to a market correction) perform after we had sold them?
  • How did the portfolios of investors who bought our stocks from us perform after they took those stocks off our hands?

Since January 1, 2012, there were 87 sales transactions from the Model Portfolio.  Some of those sales were swaps to move into other stocks and others were sales to reduce risk by moving into cash.  I wanted to find out whether those sales were actually necessary?  How did the sold stocks perform had I held on to them to the present?  Did I sell winners or losers?  Were the sales made as the market was rising or falling?  What I can I learn from about my trading habits from those sales?  For each transaction, I captured the gain/(loss) prior the sale, the gain/(loss) from the sale to current and the stock’s performance vs. the S&P 500 since the sale.  Some of the results were surprising and revealing (click on image to enlarge):

Sales Performance 1

Most interesting is that 65.5% of the sold stocks actually appreciated after the were sold.  Luckily, most of the stocks sold continued to underperform since only 47% kept pace and 53% lagged the S&P 500 Index since their sale.  Interestingly, the stocks with the largest gains after their sale were losers when I sold them.  As a matter of fact, nearly 60% of the sold stocks that had losses prior to their sale have appreciated since.  One of the largest post-sale gains was MTZ (click here for chart).

When were those stocks sold and should they have been?  What was the market doing at the time of the sale?  Except for one extremely short periods, the Market Momentum Meter has been Bullish Green since the end of January 2012 suggesting to Instant Alert Members that they have a fully invested posture (click on image to enlarge):

Sales Performance 2

What stands out is that many of the sales occurred during months during and after the end of market corrections.  For example, there were 19 sales in June and July after the Spring correction but only 9 in May and June when the correction was occurring; there were 11 sales during the Sept-Nov correction but 33 in the months after it had ended.

This may sound like overly personal but I think there are several lessons that anyone can take away from this exercise:

  • It’s important to periodically review stock sales in addition to tracking stocks you currently own.
  • Stick to a market timing discipline to avoid being unnecessarily scared out of the market when it is correcting.
  • Continue to monitor stocks you’ve sold and buy them back rather than taking a risk on something untried if, after the correction ends, the stock continues its advance.
  • Move into cash only when your market timing discipline indicates that the correction is likely to turn into a bear market reversal.

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January 2nd, 2013

Shaking Off the Fear

If you’re an individual investor, one of the most important articles of last week besides the focus on the “Fiscal Cliff” debacle was an article in the December 29 Washington Post entitled “Bull market roars past many U.S. investors“.  The gist of the story was that “Americans have missed out on almost $200 billion of stock gains as they drained money from the market in the past four years, haunted by the financial crisis……Individuals are withdrawing money as political leaders struggle to avert budget cuts that threaten to throw the economy into a new slump.”

According to the Post, much of the damage to investors is “self-inflicted” because of fear and anxiety brought on by market volatility and memories of past “crashes”.  However, U.S. growth has improved and earnings tied to the economic are expanding.  Those improvements have been reflected in stock prices.  Of the 500 stocks comprising the S&P 500 Index, 481 are higher now than they were in March 2009 or when they entered the gauge.  Some of the statistics supporting these conclusions are:

  • Investors are lowering the proportion of stocks they own in retirement funds during a bull market for the first time in 20 years.
  • The proportion of stocks in the assets in 401(k) and IRA (excluding money market funds) fell to 72 percent from 72.5 percent in 2009.
  • The percentage of households owning stock mutual funds has dropped every year since 2008 to 46.4 percent in 2011, the second-lowest since 1997. [Of course, this could also result from the wide choice, availability and acceptance of competitive ETFs]
  • New money has gone to the relative safety of fixed-income investments as corporate bonds and Treasuries have received nearly $1 trillion since March 2009.

Housing is making a comeback and housing stocks were among the leaders last year, banks are on the mend and financial stocks were also among the best performers and 2013 auto sales are projected to approach 1.5 million. Is it time then for individual investors to begin fearing declines in the value of their fixed income investments as interest rates reverse (regardless of Bernanke’s protestations to the contrary) and start moving money back into stocks?

Meanwhile, institutional investors (the group I call the “herd”) hasn’t fared that well in the market either.  According to in December 26 Wall Street Journal article entitled “2012 Was Good for Stocks, Bad for Stock Pundits“,

  • At the end of 2011, Mr. Cramer warned investors to avoid bank stocks. Oops. They were one of the best-performing sectors in 2012. He urged investors to avoid real estate, but housing prices are up more than 2% from a year ago…..and the stocks of home builders, as measured by the S&P Homebuilders exchange-traded fund, are up 53.6%.
  • Of the 65 market “gurus” tracked during the last few years by CXO Advisory Group, the median accuracy for market calls is 47%. If that sounds low, or you wonder about the quality of the pundit, consider that the list includes such well-known names as Bill Fleckenstein (37%), Jeremy Grantham (48%), Bill Gross (46%) and Louis Navellier (60%).

So how do I deal with the noise coming from the “talking heads” and the uncertain produced by the market?  I maintain my equanimity in the face of volatility by relying on how market participants have behaved during similar situations in the market’s history.  I rely on my Market Momentum Meter to give me some indication of what market participants believe will happen, on average, in the near-term as reflected in their collective buying and selling decisions.  It’s measure by whether they are pushing prices up or down and the momentum behind those decisions.

The Market Momentum Meter turned a bright Green on January 31, 2012 when the Index was 1312.41, or 10.25% under today’s close of 1462.42.  It wasn’t Green for only 10 trading days during the year (the longest period was 7 days around the November correction low:

Like a parent who never quite trusts riding in a car that his kid is driving, I didn’t fully trust my own creation.  It took me a few months after that Green signal at the end of January to increase the money I had in stocks.  As hard as I tried to totally drown out the noise (news) about Euro debt and currency problems and, more recently, the fiscal cliff debates, I never could bring myself to be fully invested and, like corporate America, always had a significant amount of cash on the sidelines.  And then in after the November elections, as the Market reacted to the realization of a second Obama term and continued Congressional stalemate, it looked for a couple of weeks like we might see a repeat of the 2011 market implosion.  Fortunately, I waited this one out and saw money begin flowing back into stocks as prices quickly recovered.

Like many other market participants, I need additional “guarantees”.  Even though the Meter says that these sorts of market conditions in the past have lead to higher prices and that it’s all clear to be fully invested with relatively low risk, I still want to see the Index continue its assault on the all-time highs by first crossing above where it stalled out last September.  When that happens (which could be next week), I’ll feel more comfortable putting rest of cash to work.

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November 7th, 2012

The Market and the Quadrennial Election Cycle

Nate Silver has really made a name for himself by accurately predicting the outcome of the past two Presidential Elections through statistical analysis techniques. I’m clearly not a statistician but several people did asked me, both before and since Tuesday, what I thought the elections would mean for the stock market. Which would be (have been) better for the market, a Romney or an Obama victory.  We don’t have to wonder any more because the market responded today with a 2.36% decline, the worst one-day drop in around six months.

Rather than guessing or predicting as to what the future might hold, I decide instead to look at the historical records, the precedents, to see what actually did happen in the years following each of the quadrennial elections since WWII.  It’s the approach I used in developing the market timing techniques underlying the Market Momentum Meter, a tool that has guided the amount of money I should pull out of the market to avoid the risks of a significant market downturn.  Without divulging proprietary information available exclusively to Instant Alerts Members, the Meter is on the verge of changing again from extremely bullish to significantly bearish.

Perhaps the following statistical analysis of the Market’s performance in the 12 months following the quadrennial elections will provide similar guidance:

  • Before yesterday, there were 16 quadrennial elections beginning in 1948
    • The market is not totally agnostic when it comes to political affiliation
      • Nine were won by the Republican candidate, seven by the Democrat
      • Of the 9 Republican wins, the market finished higher the following September 3 times and lower six times
      • Of the 7 Democrat wins, the market finished higher the following September 5 times and lower twice
    • The average changes in the market, as measured by the Dow Industrial Average, has been
      • an average 1.5% gain in the two months to year-end
      • a give back to break-even by the end of the following March
      • an average net gain of 2.0% by the end of the June following the Election
      • a marginal improvement to an average 2.3% by September, or 10 months after the election
  • There has been a wide range of changes during those time intervals:
    • in the 2 months to year-end, the maximum gain was 8.0% and the maximum decline -6.6%
    • in the period to March, the maximum gain was 13.2% and the maximum decline was -8.4%
    • to the following June, the maximum gain was 27.0% (during the Tech Bubble in 1997) and the maximum decline was -11.8% in 1948
    • to the following September, or 11 months, following the election the maximum gain was 31.5% in 2007 and the maximum loss was -19.4% in the Tech Bubble Crash of 2001.

Putting it all together, here’s a picture of the market’s action following each of the quadrennial elections. (click on image to enlarge)

Today’s -2.36% decline is at the outer limits of the total amount of decline that’s usually taking place between the Election and year end.  This one-day drop is more than 14 of the past 16 cycles; the only two that were greater took place in 1948 (-6.6%) and in 2008 when it declined -6.8% at the beginning of the Financial Crisis Crash.

Hopefully, today’s horrible reaction represents about half of the total we’ll see to the end of the year. Unfortunately, if the market isn’t able to recover this loss then there’s a strong possibility that there will be a follow through of the downside at the beginning of next year.

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May 24th, 2012

Moving Averages: Trend Inidicator or Resistance/Support Level

There are almost many discussions in technical analysis circles as to whether moving averages are predictive and form resistance and support levels or whether they instead exclusively depict historical information (like, the average price of a stock over the past 200 trading days) and indicate trends (like, the average price over the prior 200 days continues to improve).  I’m not going to take either side other than to say you can’t use one to the exclusion of the other.  What I can say is that the 200- and 300-dma’s have performed extremely well as support over the past week (click on image to enlarge):

It could purely be happenstance or it could be that the close proximity of the two moving averages intensifies their support support capabilities or it might just be that a few more trading days will see the Index cross both moving averages indicating a dramatic deterioration in the market’s health and future prospects but for the time being it does break some temporary comfort and relief to those of us who are of the “technical persuasion”.

Where to from here?  Your guess is as good as mine.  But what I do say is that I’m relieved that I have a discipline that insulates me from all the speculation we’re bombarded with daily in the business media by neutralizing the day-to-day volatility and helps me focus on the longer term picture.  My Market Momentum Meter distills the market’s trend over a number of time horizons and translates the analysis into a single number which, when compared to experience over nearly 50 years of market data, indicates what market tactic (all cash or fully invested) which will like generate the best likely outcome.

My Market Momentum Meter is at the borderline and may soon suggest a more conservative, risk-off approach but for the time being it still indicates that the market’s longer-term trend continues to be “provisionally, moderately bullish”.

 

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May 16th, 2012

The Difficult Choice

The times aren’t easy for market timers.  The market has declined around 6% since the April 2 peak of 1419.04 and the anxiety level is rising.  The question of every market  timers lips are: “Should we sell into this decline and, if so, how much?  Is this a collapse similar to the stealth bear market brought on by last year’s Federal budget deficit crisis, the S&P downgrade of US debt and the deepening lose of confidence in the Euro currency?  Or, as many have discussed before, are we merely going through a typical “sell in May” correction which, if we stay put, we’ll recover from relatively unscathed in the fall?

Contrarians might take the opposing side and ask “Should we take advantage of the opportunity presented by lower prices and begin to pick up some bargains while we have the chance?”  As the saying goes, that’s what makes a market.  Two diametrically opposing views leading to two opposite courses of action, both coming from the same set of facts.

Unfortunately, the chart of the S&P 500 doesn’t provide much insight as to the best course of action.  I first began surveying what I called a “congestion zone” on April 12 in “Identifying the Boundaries of Stock Chart Congestion Areas” and followed that up on April 23 with “The Lower Boundary is Becoming Clearer“.  Here we are, just over a month later, and without any clearer idea of what the boundaries of the zone are or whether we may have actually fallen through the bottom of the zone and began a downward trend.  The striking thing is the apparent similarity between March-April hump this year and the April-May hump last year.  Let’s hope the slide when the Index crossed below the 200-dma last year isn’t repeated this year.

The market index has fallen through the lower boundary of what could have been a flag pattern.  It fell below what I was hoping would be the neckline of a small head-and-shoulders pattern.  It fell below the 100-dma and is quickly approaching the 200-dma (which, coincidentally lies just above the 300-dma).  If last year is any example, then the selling could again be quick and deep.  But the recovery 4-6 months later was just as sudden and it may be so again this year.

The Market Momentum Meter was tested against nearly 50 years worth of stock market history and in the process identified the conditions (as reflected in the relative positions of the moving averages and the Index itself) under which exiting the market was the best strategy.  At other times, staying in the market, regardless short-term fluctuations, was the best long-term strategy.

So far, the Meter is still signalling a full commitment.  However, extrapolating further straight-line declines of an average -0.168% per day (the average daily rate of market declined between March 26 and yesterday’s close), the signal would turn a Cautious/Yellow when the Index hit approximately 1290 and a Bear/Red at 1240.  Coincidentally, those are the approximate levels of the 200-dma and of a long-term trend line that has been the locus of multiple pivot points since the Tech Bubble began in 2000, respectively.

Last year, however, the market’s decline was so steep and rapid that the Meter’s exit signal was too late.  Furthermore, the recover was rather quick so that it failed to signal a timely return.  Unfortunately, the difficult choice being faced is between violating our discipline and sticking to the discipline and risk further losses.

May 3rd, 2012

Rohrbach on Market Timing

I shouldn’t but I will anyway.  I shouldn’t whine but you’re all friends or you wouldn’t be reading this so I’ll borrow your shoulder to cry on and your ear to hear my complaint.  OK, here it goes, “I don’t understand why more of you haven’t subscribed?”

I happened across a series of interviews on Forbes.com with Jim Rohrbach of Investment Models about using moving averages to spot trend changes.  The essence of Rohrbach’s message is that:

  • “[You] can’t look into the future. If you can just identify when the trend changes, that’s all you need.”
  • “[Most traders] don’t know how to identify a change in the trend in the market, and it’s not that difficult, if you spend the time to try to figure it out.”
  • [most investors] are being told constantly by brokers, etc., ‘Don’t try to time the market…it can’t be done.’
  • [Rohrbach] “spent seven years working on the mathematics of that thing. I kept stumbling, but I finally came up with a way where I can take certain ingredients, which I’m not going to tell you what they are, and if I applied them to the mathematics, I could tell on a daily basis what the trend of the market was for that day.”
  • “Convert the action of the market into a number. That number represents the trend for today. If the market is going up several days in a row, that number will go up, and vice versa.  But you’ve got to know the ingredients, and you’ve got to use mathematics. Don’t listen to those guys on the Street, or wherever, who tell you the reasons for the market going up or down, because they have nothing to do with reality.”
  • “And you’ve got to stay in [Apple] if you’re really going to capitalize on this thing. If you get out because Apple dropped ten points today, that might be a big mistake…… Stay in, stay in, stay in. Even if the market goes down 200 points.”
  • “You don’t have to be smart. You have to be intelligent. You have to have a strategy that tells you when to get in and out….if you have something that’s worked for 40 years, then once you know where the market’s going, the trend of the market, then you can start playing around with individual investments.”
  • “Just play it with the market. It’s telling you—and I know that’s kind of difficult for the average person to do, and it’s also very difficult for them to have the discipline to act on every signal. Your emotions get involved in this game, especially when your money’s involved.”

I tell you all this because I want to demonstrate what I’ve been writing here about since starting this blog over six years ago are the same things that others in the know have been doing also.  I also studied the market’s action since 1963, almost 50 years worth of history, and came up with my own mathematical indicator as to the strength of the market’s momentum and direction; I call my indicator the Market Momentum Meter.

If market conditions remain relatively unchanged over the next several weeks, the Market Momentum Meter will approach a critical level early in June.  Members to Instant Alerts see what the Meter’s reading is each time I make a trade; each day’s reading is recapped in the Weekly Report.

Rohrbach charges $395/yr for his market timing service or, as he says, “about a dollar a day”.  My service is less expensive plus you can see how I translate my Market Momentum Meter into actual trades shortly after their execution.  I also keep track of the the performance of those trades in a Model Portfolio because market timing needs to be followed with a high success factor in stock selections (even the best in baseball strike  out once in a while).

The market is at a critical point.  Is it correcting or reversing?  Should you sell in May and go away or buy in anticipation of a market resurgence?  Become a member to see what I’ve done.  Don’t put it off, act now!

February 23rd, 2012

How Reliable is the “Stocks on the Move” Scan?

If you’ve explored this site you’ve learned that one of the benefits of a membership is access to Watchlists, lists of stocks culled from the 7000 or so publicly-traded stocks by way of scans whereby all stocks are filtered against combinations of different financial and technical parameters and by my visually scanning hundreds of stock charts for potential breakout potential.

One of my favorite scans is called “Stocks on the Move”, a filter that focuses on parameters defining outstanding fundamental operating plus strong technical performance.  I developed this scan a number of years ago while attempting to replicate similar lists published in Investors’ Business Daily.  My scan was modeled after IBD’s and frequently delivers many of the same names.

A subscriber wrote the other day asking whether I’d “performed any regression analysis to ascertain the relative predictability of these parameters?”  I had to confess I hadn’t performed any rigorous analysis and realized that I should …. for the benefit of both my subscribers and myself.

I had twice posted the results of “Stocks on the Move” scans (July 22, 2009 and March 2, 2010 ) and I made the most recent list available exclusive to subscribers on January 6, 2012.  But the question remains: on a back-tested basis how reliable were these scans?  If you had selected stocks from any of these three lists, what’s the probability that they would shown a gain? outperformed the S&P 500? would the performance be any different 100 days, 200 days, 300 days or 500 days in the future?

Some might argue that this is a limited sample but I believe it’s indicative of the potency of “Stocks on the Move” as a reliable source of investment ideas with a low risk and high probability of outperforming the benchmark.  Of the 7000+ stocks the scan picked up the following stocks more than once and all together 358 different stocks:

But the question asked whether it was possible to “back-test” the scan to determine how well the stocks captured in the Stocks on the Move scan performed over various time horizons:

The back testing was performed at intervals of approximately 100 trading days after when the scans were run against 2 measures: absolute performance and performance vs. the benchmark S&P 500 Index over the same periods.  Interestingly:

  • Stocks filtered out in the scans run on both days, more than 50% of the stocks filtered out by the scan appreciated above the price on the day of the scan for 300 or more trading days into the future (of the S&P 500 Index, half perform better than the Index itself by definition).
  • More than 60% of those stocks also outperformed the S&P 500 far after the Scan was run however that better than average performance occurred primarily shortly after the scan run date; by approximately after the end of the first year, those stocks  no longer showed superior relative performance.

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February 14th, 2012

Is the Market Overvalued and Overbought?

I was struck by a post on Slope of Hope entitled “An Ongoing Balloon Ride” the major premise of which was that the the market has risen too far and diverged too far from its 400-dma such that there’s no questions “if this debt-filled balloon will disintegrate, but when“.  The writer’s premise is that the several times in the past when the Index has diverged as far as it has from its 400-dma have all been followed by a drop or correction.

I have my own database and decided to do my own research and gather my own facts to see whether I could replicate those results and come to the same conclusions.  My database goes back to 1963 and the moving average I rely on is the 300- rather than the 400-dma (but what difference does a hundred days make between friends).  The Slope writer visually picked the areas when the index diverged significantly from the moving average and eyeballed the subsequent change.  What I discovered was:

The S&P 500 Index is currently 6.38% above the 300-dma.  In the 12,089 trading days between March 12, 1963 and March 11, 2011, a spread between the index and the 300-dma of 5.00-7.99% occurred on one out of every 6 days, or 16.89% of the time.  One could almost say that this spread is “typical”, not large or overbought or stratospheric.  Actually,  it’s fairly typical.

One can look at both tails of the distribution as indications of how extreme the spread defining overbought or oversold situations, times when one needs to sell or has a true opportunity to buy.  In 2008 and 2009, at the depths of the Financial Crisis Crash, the market was over 35% below the 300-dma …. we should have all bought then but few had the nerve.  In August, 1987, the market was 24% above the 300-dma; a few months later, the market suffered it’s largest single daily decline in the October Crash …. we should have sold.

The market was more than 20% above the 300-dma also in 1983 as the market rocketed in celebration of its exit from the secular bear market of the 1970′s.  Rather than crashing, the market went into a horizontal consolidation lasting 15 months (just like the past 15 months?  I’ll leave that determination for you to make.)

So is the market now overbought?  Not if you use the 300-dma as a benchmark.  Did the Slope of Hope contributor select a seldom used 400-dma benchmark to prove his point?  It’s possible.  Where would the market have to be for it be overextended or overbought by these measures?  Somewhere around 1500-1550 …. interestingly, exactly the level of the market’s all-time high as measured by the S&P 500.

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