Category Archives: Tommy’s Take

Weekly Option RS Movers 5/19/2015

WO Equity RS GainersEquity Gainers FINVIZ

WO Equity RS LosersEquity Losers FINVIZ

WO ETF RS GainersETF Gainers FINVIZ

WO ETF RS LosersETF Losers FINVIZ

Good Luck and I hope this helps!

New Tools: May 15, 2015 Breadth Thrust Dashboards

As mentioned a few weeks ago, I am always working on ways to find potential fast moves early.  One of the better short term breadth indicators I use for reversal plays is the Breadth Thrust Indicator which I alway post on the broad sector level, but until now it has taken too long to search through all 49 subsectors to see where we might have a good potential for a more focused bottom.  I actually prefer this indicator to the McClellan Oscillator because it is a ratio calculation allowing for better relative comparisons to other subsectors.  It is an even bigger bonus is that this indicator gets no respect, most see a bunch of squiggly erratic lines on the chart.  I have seen the Breadth Thrust Indicator dismissed so many times, which makes it that much more valuable in my eyes.

This weekend I built this layout that allows quick scanning of all 49 subsectors on one screen.   I am still working with its size and scaling for best visual.  So far, I like it.  I am sure I will include this in the SIN report from time to time, but for now I will be monitoring its characteristics closely to see how best to utilize it in my portfolio management process.  Let me know if you have any ideas, I always appreciate a good conversation on how to better use my tools.

Broad SectorsBasic MaterialsConsumer DiscretionaryConsumer StaplesEnergyFinancialsHealth CareIndustrialsReal EstateTechnologyUtilities

Have a great week!

G. Thomas Lackey Jr, CMT CFP® CFS

(All market data above are derived from Stockcharts.com, Esignal, and Reutersdatalink)

The information set forth herein was obtained from sources which we believe to be reliable, but we do not guarantee its accuracy.  Neither the information, nor any opinion expressed constitutes a solicitation by us of the purchase or sale of any securities or commodities.  I or my affiliates may hold positions or other interests in securities mentioned in the blog.  Full Disclaimer

There is no guarantee that the views expressed in this communication will become reality.  Investing in the stock market involves risk and potential loss of principal.   Investment strategies should be thoroughly researched and understood before implementing and none of this should be construed as a recommendation.

Sharpe as a Marble

Going back to the early days of my career before we all had internet in our offices and main frame computers in our laps that provide more free information than we could ever digest rushing out of them like a fire hose, I knew even then that there was much more to managing a portfolio than choosing some good performers and diversifying out the risk.   From very early, I searched out analytic tools from places like Morningstar, Lipper, and Value Line.  These were sent in monthly or quarterly updates at the time with the stocks and funds they covered.  Once we got our own computers and they developed the software (dating myself), we then got to start building portfolios and getting an idea of how they had performed on a longer term basis.  This was in the days of looking at 5 & 10 year track records to guide us.  The problem is, with the volatility we have seen not only in the markets, but also in the management teams that run these funds, if the manager has only been there a year, then a 5 or 10 year track record is useless.  This was the best we had back then, so we worked with it.  One of the best measures we used back then was the Sharpe Ratio derived in 1966 by William Sharpe as a way to see how much excess return you are getting for the extra risk you are taking over the risk free rate.  The Equation is below:

You can read more about it on Investopedia if you are not familiar.  However, from very early on, I always had an issue using Standard Deviation as the sole risk measure because it doesn’t distinguish in any way from positive or negative deviation which is a problem if you are trying to really assess risk.  My feelings were, it wasn’t really sharp at all, but back then, that was about all there was and, with limited computing power, more complex formulas were burdensome.

Fast forward to me moving more to tactical management for my clients in the late 1990s (yes, right before the Internet bubble burst which was a blessing and a curse during that time).  Once I started moving assets around more often, all of those resources above became less useful since they would only look at portfolios in a static manner.  I fell away from using these risk measures as much and lost a piece of my analysis in the process.  From then, the returns pretty much became the focus until more recently.

Now there is nothing wrong with focusing on returns, after all, that is the goal in investment portfolios, but when working for clients and managing the bulk of their investment assets, not just a 10% strategy allocation, how you get there can become as important as the final results.  All clients want their portfolios to do well over the long term (and short term, in reality), but they also want it to be somewhat comfortable along the way.  Higher potential returns do usually come with higher risk, but the clients often underestimate this going in and need to keep some peace of mind to stay the course whatever strategy they choose.

In the ETF portfolio strategy I have been building since introducing the Strength In Numbers report in 2013,  I have put a good bit more focus on positioning, rotation, and how these influence the reward to risk profile of the portfolio.  This focus and new computing and reporting powers have allowed me to get back to these roots and focus more on building the best possible return with the most advantageous risk profile possible.  It is very exciting to track and follow these in real time to help improve my processes.  I will have to agree with Barrons in voting Interactive Brokers as the best online custodian with the best reporting for the 4th year in a row.  They do an excellent job with their performance reporting and allowing you to add important risk measures like Sharpe Ratio, but they don’t stop there…

One simple report also gives you a whole litany of other useful stats as you can see in the sample below.  This is just one example of how a report could be set up via your custodian or add-on software, but it does cover a good bit very concisely.

Here you see not only maximum draw down, peak to valley, recovery, standard deviation, and many other useful stats, but also two new ratios that are right up my alley.  The Calmar and Sortino ratios are risk measures like the Sharpe Ratio, but they actually differentiate for upside and downside risk.  It takes a little more digging to find information on these than it does to find it on Sharpe, but both are worth the search as I believe they paint a much better picture of the portfolio merits.  There are certainly other risk ratios you can use, but these fit well with how I like to look at things.

Sortino Ratio was created in 1983 by Brian M. Rom at the software development company Investment Technologies.  The ratio is named for Dr. Frank A. Sortino, an early popularizer of downside risk optimization.  Here is the formula:

The above excerpt from the Wikipedia page shows this formula is definitely more complex than Sharpe in order to factor in draw downs.  In doing so however, it makes for a much better measure of how much risk is really in a portfolio since none of us really mind the risk of making more money than we expected.

Calmar Ratio (drawdown ratio) is a modified version of the Sterling Ratio which does factor draw downs in to the indicator.  For more depth info and formulas for these, click the links above.  These ratios were typically calculated on an annual or monthly basis, again due to the time it took to calculate them when created (we take this for granted every day).

Performance and track record is where most of the focus goes in portfolio management side of our business, but we would be well served to spend a little more time on the risk adjustments when analyzing how well a portfolio has really done when measured in a relative fashion with other potential choices.  It doesn’t matter if you are reviewing your own performance, that of a potential adviser, or even a subscription service, finding a way to properly measure different strategies based on reward AND risk is the key.  As I mentioned in a tweet recently, cautioning to fully understand how those track records are calculated and if they are marked to market or not.  Most I have seen are not, which is a bit scary in this day and age.  The good news is sites like Marketfy.com are trying to change this as we speak in the subscription space.  However, it doesn’t really matter what medium you are reviewing, you want to do your best to cut through the spin and get to the meat of the situations.  Viewing things from this perspective can help accomplish this in an effort to provide that confidence we all need to keep moving forward toward our goals.

Good Luck and I hope this helps!

Variable Soup: Do you have the right ingredients?

I wanted to take a second and talk a little about one of the big issues I see with newer portfolio managers and traders to some extent.  The problem is figuring out which variables to take into consideration in their trades.  Whether long or short term, I refer to any position as a trade.  There is probably a just right out there, but that comes down to your tastes per say.  I don’t ever like to overly question someone else’s trading style because if it is working for them, great.  There are many ways to win at this game, but they all take a good bit of trial and error to find what combinations to use and which set of them fits with our expectations and personal psyche the best.  The issue most find is there are so many variables out there from technical, fundamental, economic, sentiment; trying to choose can leave even the most intelligent person’s head spinning.

Unfortunately, this short post will not give you the answer, but instead a few things to think about along the journey.  Basically, my advice is simple; stay away from the extremes and find your recipe including a variety of flavors that suit what you are trying to serve.  In this instance, the worst thing you can do is focus too much on 1 variable and get pigeon-holed into a closed view.  There are plenty of studies that show we make worse decisions when our options are binary yes or no.  Combine that with the unlimited number of variables that could affect any situations and you can see how this could leave a bitter taste in your mouth when it doesn’t work.  I hear a lot of this and recognize the pull in the media and especially social media when a certain meme is being passed about.  As an investor, you should never let yourself live in a 1 variable world.

Then we have the other extreme which is the chase to take into account every variable out there….and throw in the kitchen sink while you’re at it.  This is like the Brunswick stew of the analysis world (I am not a fan of Brunswick stew).  Those who attempt this are always chasing down another factor and bringing something else in to worry about.   The problem here is, our brains are designed to put more weight on things we are worried about even if there are more factors in our favor.  This can skew the analysis the more variables you get in the mix.  I have seen traders who go into every trade worried.  I agree you should go in with a healthy respect of risk, but I do not think we should be entering every trade expecting to be wrong.  This is a delicate balance and one very important to address.  If you go into every trade expecting to be wrong, you find yourself setting stops too tight (yes, you do have a stop, but should place it based on chart variables) or capping the potential gains too early.  We all get stopped on things and will figure out how to manage risk with our trading plans, but why go into a trade you don’t have conviction in which becomes more of a problem once the number of variables considered gets above a reasonable amount.

So, the answer comes in a lot of practice and trial and error.   Variables can come from anywhere, but we can only functionally keep up with a certain number of them and the changes in the relationships between them over time.  We have to put the time in over the hot stove testing our variables.  We each have different tastes, so the different variables should be suited to those tastes.  As long as the taste we are all looking for is the taste of success.

Good Luck and I hope this helps!

From 0 to Weekly in 4.9 Seconds!

I had the opportunity yesterday morning to spend a few minutes on the Benzinga Premarket Prep Show answering questions on the markets, stocks and pretty much whatever they asked.  At the bottom, you can find an embedded recording of the session if you would like to listen.  As we moved through and were talking charts, I told the guys they could throw me any tickers they wanted and I would be happy to comment.  I do feel very comfortable doing this because over more than a decade of research, tinkering and a lot of trial and error along the way, I came up with a template I use for my initial review of any security I look at.  It doesn’t mean I will be right, but this quick review has become second nature at this point and I feel I can give a decent read on most securities in under 5 seconds using this method (hence the title).  Below is an example where I have an intraday snapshot of $TAN to show it.

Now, I am not going to get into the debate on necessary screenspace, but you can probably guess, I like more versus less.  This template is built in Esignal which I have used for over a decade now, and all of the charts on the template have both volume and volume at price (VoP) plotted.  Let’s take a second and go through each chart in the template and what is plotted on it.

Top left is my moving average chart where you see I have the 5,10, 20, 50, 100, 150, 200 day simple moving averages in the price window and On Balance Volume Indicator (OBV is plotted at the bottom.  That particular indicator has been a good tell during this recent surge.

Top middle is the daily momentum chart which is plotted with standard Bollinger Bands in the price window.  Below is plotted the standard 12/26/9 using modern formula.  Finally is the standard 14 period RSI posted with 9sma and 45ema of RSI posted on the RSI.

Top right is the same configuration as the last window, but in a weekly view.

Bottom left is the same configuration as the last two, but in a 30 minute view with after hours action included.

Bottom right is the 5 min chart with the Accumulation Distribution Indicator plotted in the price window.

This gives me a very quick scan of most of the information I need to make a relevant decision on any security.  Sure, sometimes I go look at other charts outside these as I get more serious, one of which is my RSI charts, but for my first glance, this can quickly give me a plethora of important information that I would certainly consider with any security that comes my way.

As I mentioned in the beginning, this has culminated from many years of using various techniques and indicators; and this is what works for me, it may not for you.  I like to take in and process a lot of information quickly and even train my eyes and brain on a regular basis for just that task.  I believe and have personally experienced getting better use out of both of those muscles from regular exercises at sites like Lumosity.com and a few peripheral vision exercises I learned about around ten years ago.  Whatever angle you approach your trading, I encourage you to always seek out things that can help you get better and more efficient with your edge.

Good Luck and I hope this helps!