Dancing with the Trend

Fundamentally Flawed Analysis

Literally hundreds of millions of dollars are spent each year on the analysis of individual securities by Wall Street brokerage firms and independent firms (Zacks, Hoovers, Value Line, etc).  Most brokerage firms have a large staff of analysts, which make huge salaries, and are widely summoned to television shows each day for their opinions based upon their research.  Most will focus on a single industry so that their expertise will not be diluted; they are specialized, they are considered experts.  In fact, most of what makes up daytime financial television are the interviews of these analysts, and of course, the never-biased (TIC) CEOs of the companies.

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Article Summaries 9-2015 to 11-2015

Most blog authors on StockCharts.com are writing about the current markets and do an exceptional job.   I do not write about the current markets as I want to share my experiences after 40+ years as a technical analyst.  Not only experiences with trading and investing, but model building and money management.  I also share the details of all the Master’s degrees I have – those expensive learning experiences that hopefully I learned something from.  Since I rarely go back into the archives of other’s blogs that I read, I wondered if that is common or not.  Hence, after talking with Chip, a summary of my past articles might encourage new readers to take a look as most of the material is timeless.  That’s timeless, not worthless!  This is the third of the summary series and starts in September, 2015 and ends in November, 2015.  My goal is to do them whenever I have a dozen or so articles to include.  You can click on the article name for a link directly to the article.

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Deficient Frontier

It is almost impossible to see any performance comparisons that not only show a benchmark, but also show a mix of 60% equity and 40% fixed income, known as 60/40 in the fund industry.  The Efficient Frontier is one of those terms that came from a theory developed decades ago on risk management.  Modern finance looks at a plot of returns versus risk, and of course by risk, they mean standard deviation.  This is the first mistake made with this concept.  As I have written about many times before using standard deviation as a measure of risk is flawed from so many angles it takes and entire article to describe. See article Risk is More than a Four Letter Word and What is It with Modern Finance?  Then they plot a variety of different asset classes on the same plot and derive the efficient frontier which shows you the level of risk you take for the asset classes you want to invest in.  Chart A shows that efficient frontier curve from 1960 to 2010 (an intermediate bond component was used).  Next, if you draw a line that is tangent with the curve and have it cross the vertical return axis at the level for an assumed risk free investment, then the point of tangential is the proper mix of equity and bonds.  I did not attempt to do this here as the determination of the risk free rate to use over a 50 year periods presents too much subjectivity.  Guess I just found another problem with this process.  From 1960 to 2010, that mix of stocks and bonds is about 60 / 40.

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CGMBI-Non-Internal Breadth Indicators-Chap 11

This is the final article highlighting the chapters and indicators in my new second edition of The Complete Guide to Market Breadth Indicators.  This is a completely new chapter as I did not include non-internal breadth in the first edition; I stuck with internal breadth only.  Don’t ask me why.  I do not have an answer.  However, I will accumulate questions from readers via the Comments section and will write additional articles addressing those questions.

A brief sales pitch to follow: Before we begin the review of Chapter 11 for the 2nd Edition of The Complete Guide to Market Breadth Indicators, I am proud to announce that after over a year of work with many of the fine folks at StockCharts.com, the book is now available in Kindle format from Amazon.  You can click HERE to go to the Amazon page.  I priced it to sell – only $19.99.  It has lots of new material from Tom McClellan, George Schade, and Dick Arms, plus all of the charts are from StockCharts.com.  Plus, an entirely new chapter (11) on non-internal breadth indicators, which is highlighted in this article.

And even more good news, we (StockCharts.com and I) have created a ChartPack that has all of the charts in the book, not only for the New York Exchange (in the book), but also for the NASDAQ Exchange and the Toronto Exchange.  The ChartPack has 187 charts for the NYSE, 187 for the NASDAQ, and 148 for the TSX Toronto.  Toronto is slightly fewer because not all of the breadth data was available, in particular, the weekly breadth data.  CGMBI ChartPack – Click Here.  This ChartPack means that you have every chart in the book plus the NASDAQ and TSX versions updated each day.  The ChartPack is only $49.95 and is good as long as you are a subscriber to StockCharts.com.  The other really nice feature of publishing with Kindle is that if I want to add something to the book, say I discover a new breadth indicator, I can do so.  And everyone who bought the book will receive the update for free. And guess what? This will be the last sales pitch on these products; at least until I forget that I said that.

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Article Summaries: 6-2015 to 8-2015

Most blog authors on StockCharts.com are writing about the current markets and do an exceptional job.   I do not write about the current markets as I wanted to share my experiences after 40+ years as a technical analyst.  Not only experiences with trading and investing, but model building and money management.  I also share the details of all the Master’s degrees I have – those expensive learning experiences that hopefully I learned something from.  Since I rarely go back into the archives of other’s blogs that I read, I wondered if that is common or not.  Hence, after talking with Chip, a summary of my past articles might encourage new readers to take a look as most of the material is timeless.  That’s timeless, not worthless!  This is the third of the summary series and starts in June, 2015 and ends in August, 2015.  I’ll try to do the remaining summaries soon and then do them whenever I have a dozen or so articles to include.  You can click on the article name for a link directly to the article.

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Benchmarking and Taxes

Many funds/strategies are tied to a benchmark.  In fact, I think most are tied to a benchmark.  The goal of these managers is to try to beat the benchmark.  Some do and most don’t; yet when the number beating or failing to beat the benchmark is usually not worthy of comment, especially over time.  I like to say that benchmarking is what you try to do when you have no idea what to do.  The World of Finance is wrapped up in relative performance and comparison.  Relative performance is a widely used investment tool, but often causes horrible investment decisions.  If a client is told his or her account is up 15 percent, they are happy; until you tell them the market was up 20 percent.  This often causes a client to search for a new fund or advisor who claims to beat the market.  We all know that no one can legally make that promise but carefully worded marketing material can easily give the reader a subliminal message that makes them believe it can be done.

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A New Breadth of Fresh Air

StockCharts.com has vastly updated not only its raw breadth database but now there are hundreds and hundreds of new market breadth indicators available to everyone.  This is not really an article but an information piece about StockCharts.com’s vast amount of breadth material and where to find it; plus, a little sales pitch at the end I thought I just throw in.  And just to help validate it all for many years I managed a lot of money using a large percentage of indicators that used breadth data.

An Example of the Value of Breadth

Market tops, also referred to as periods of distribution are usually lengthy, volatile, and extremely difficult to pinpoint the actual top except for the always 20-20 hindsight.  As traders and investors watch the market action and the financial media shows the major indices every market day (every 5 minutes), you must realize that all of the major indices like the S&P 500, NYSE Composite, and Nasdaq Composite are capitalization weighted indices.  The Dow Jones Industrial Average is a price weighted index and performs similarly.  Capitalization and price weighted indices are controlled or driven by their largest components, let’s say the ones that make up 10% of the index can account from 35% - 45% of the indices movement.  At one point the top 10 stocks in the Nasdaq 100 index accounted for 46% of its movement.

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CGMBI-Composite Indicators-Chap 9

Before we being the review of Chapter 9 for the 2nd Edition of The Complete Guide to Market Breadth Indicators, I am proud to announce that after over a year of work with many of the fine folks at StockCharts.com, the book is now available in Kindle format from Amazon.  Click Here.  I priced it to sell – only $19.99.  It has lots of new material from Tom McClellan, George Schade, and Dick Arms, plus all of the charts are from StockCharts.com.  Plus an entirely new chapter (11) on non-internal breadth indicators.  Tom McClellan completely rewrote Chapter 10 on the McClellan Indicators.

And even more good news, we (StockCharts.com and I) have created a ChartPack that has all of the charts in the book, not only for the New York Exchange (in the book), but also for the NASDAQ Exchange and the Toronto Exchange.  The ChartPack has 187 charts for the NYSE, 187 for the NASDAQ, and 148 for the TSX Toronto.  Toronto is slightly fewer because not all of the breadth data was available, mainly, the weekly breadth data.  CGMBI ChartPack – Click Here.  This ChartPack means that you have every chart in the book plus the NASDAQ and TSX versions updated each day (each week for weekly data).  The ChartPack is only $49.95 and is good as long as you are a subscriber to StockCharts.com.  The other really nice feature of publishing with Kindle is that if I want to add something to the book, say I discover a new breadth indicator, I can do so.  And everyone who bought the book will receive the update for free.  End of sales pitch!

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Past Performance is no Guarantee of Future Results

There is no doubt that investors are attracted by positive performance.  Unfortunately, most investors stop there and never accomplish the due diligence to confirm that the returns are meaningful.  In most cases they usually place entirely too much emphasis on performance without putting it into the context of the market or the ever-important philosophy behind the strategy.

Here’s a fact:  All performance measures are trailing performance.  Why do you suppose the NASD and SEC demand that disclaimers, stating that “Past Performance is no Guarantee of Future Results,” appear on all official documents and advertising?  Because they know that an advisor’s or fund manager’s performance is only a measure of how they did in the past, nothing more.  Not surprisingly, the past can be significantly affected by many events totally out of the control of the advisor or money manager.

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Article Summaries: 3-2015 to 5-2015

Most blog authors on StockCharts.com are writing about the current markets and do an exceptional job.   I do not write about the current markets as I wanted to share my experiences after 40+ years as a technical analyst.  Not only experiences with trading and investing, but model building and money management.  I also share the details of all the Master’s degrees I have – those expensive learning experiences that hopefully I learned something from.  Since I rarely go back into the archives of other’s blogs that I read, I wondered if that is common or not.  Hence, after talking with Chip, a summary of my past articles might encourage new readers to take a look as most of the material is timeless.  That’s timeless, not worthless!  This is the second of the summary series and starts in March, 2015 and ends in May, 2015.  I’ll try to do the remaining summaries before year end and then do them whenever I have a dozen or so articles to include.  You can click on the article name for a link directly to the article.

Continue reading "Article Summaries: 3-2015 to 5-2015" »