Saturday, November 30, 2013

11/30/2013 Be prepared for a "scare market"

Sector Model
Large Portfolio
(Since 5/31/2011)
Sector Model
Large Portfolio


Rotation: selling QCOM; buying OUTR (again).

QCOM currently has a return rate of 57.32%, so it’s in a good spot to take profits.

OUTR only netted a few dollars last time, but it might be better positioned now.  We’ll see.  In the meantime, my two gold stocks continue to flounder.

As for the broad market… eh.  People are talking it up and down, and I’m thankful that I don’t have to factor any estimates of the market’s direction before I pick a stock.  That said, we are overdue for a correction, but not due for a bear market, and we should be 5-10% higher by this time next year.  The taper, if it comes, might slow down the advance, but not reverse it.

The key here is that tapering is not tightening.  The wild card, however, is the estimate that people have.  No one pays for a stock based on what they think it is currently worth.  Instead, they invest based on what they think the stock will be worth in the future.  The same goes for the broad market estimates.  So then, while a taper is indeed not in itself the same thing as “tightening,” it IS a signal that tightening is more possible than it was before the taper.

As we’ve seen in previous demographic estimates, the market would be worth less than 1000 if there had been no QE, and even though we are due for a bull market NOW, that bull market would have begun at a much lower level than now.

With continued QE, the market should go up.

With tapering, the market should go up.

The market should only go down if QE is reversed.  Reversal should not happen before 2024.  If the market THINKS it is going to happen before then, we could see – not a bear market – but rather a “scare market.”  A scare market would look like 1987 – a sharp drop followed by a continued advance, causing market timers to suffer in both directions.  It will depend in large part on how believable and clear Yellen is that there will be no tightening before 2024.  I don’t think she’s considered that far, however, so a scare market is more likely than an uneventful advance.

Write down your plan ahead of time.

Stick with it.





  1. Having exited the profitable positions (except BCR), the portfolio now mostly comprise losing positions. Has that situation been encountered in the past?

  2. Been a while. Won't always happen that way. Would have exited ED if the trade had happened just one day earlier.

  3. A related question is - are there any technical considerations for holding a position that goes against you over a certain period of time? It would be interesting to research the "point of no return" for such positions, e.g. if a position is still a loser after X days, where X is commensurate with the average holding period, what would X be such that a turnaround is statistically doomed?

  4. There are two aspects to the model. One is technical (with the average holding period of 92 days). The other is fundamental (with the average holding period of 821 days).

    The dividing line is 340 days. If a stock is still a loser at that point, it becomes a long term play. I keep track of all stocks even after I close them, to calculate the holding periods.

    If ABX makes it that far, it will be the first to do so. Looks likely, though.

  5. It always strikes me that before the next quarter's fundamentals are made available, the technical stock data contains valuable yet-unpublished info, i.e. a partial predictor of the upcoming fundamentals. However, that seems rather orthogonal to the above double-aspect model.

    From a tax angle, stretching out to long-term capital gains and short-term capital losses seems advantageous too.

  6. Agreed. From a tax angle long term capital gains and short term capital losses are the best.

    The insidious part is that from a performance angle you are better with short term gains and long term (gains / losses). In other words, the fundamental characteristics don't say when something will go up, only the likelihood that it will go up at some point in the future.

    To make things even more convoluted, I'm calculating returns based on annualized return rates. A 40% loss after 3 years on one stock doesn't turn into as bad an impact on the model as it would to include stop losses and try to cut off losses early.

    If you picked ten stocks at random, you'd do better with progressive stop losses -- cutting off losers early and letting winners run.

    If you picked ten stocks with a fundamental margin of safety, you'd violate stop losses at a higher rate and end up harming your returns -- because fundamental value stocks are typically at a point of maximum volatility at the point you pick them. The fundamental platform only ensures that the business has a likelihood to SURVIVE long enough to work out a gain.

    With those givens, I've ended up with a ranking based on fundamental potential / realized return rate. BCR has the best realized return rate, but also ranks well on fundamental potential. ED, on the other hand, hasn't lost much, but is fundamentally weaker than the other selections in the current list. ED, therefore, would be the one I would sell today, rather than BCR.

  7. Interesting point re max volatility at point of pick for fundamental value positions. Assuming you have more than one desirable choice at the point of pick, would it make sense to opportunistically buy with limit orders set at aggressive lows (commensurate with prevailing volatility), e.g. basket buy order where the first filled order cancel all others.

  8. One of the factors is how badly the stock has done in the past few days, so it's kind of already doing that.

  9. Tomothy,
    I don't quite understand the system, though I've read through more than a year's postings.
    1. The sector model: do you switch to the strongest sector on the day that sector surpasses the second best sector? Is one day 'in the lead' then enough for you to change sectors?

    2. The individual stocks: I understand that you use a formula that compares the possible return based on fundamentals with the realized return. But then I wonder: do you have software that allows you to compare some 5,000 stocks (or more) based on that formula, or do you limit the choice to the strongest sector?

    Can you shed some light on these 2 questions, please?

  10. The sector model rates 9 sectors by the ratio of price strength to volume breadth. The full model does the same thing with 97 industry groups.

    For the sector model, I'm able to trade before the close using intraday data. For the full model, I'll usually run an analysis over the weekend.

    Once I've isolated the best 11 industries on the full model, I'll look for the best fundamental configuration among the stocks in those industries. I do run the comparison on all 6500 stocks listed in Value Line, but I only select among the industries isolated by the model.

  11. Thanks for the information