Category Archives: Tommy’s Take

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Drilling Deep into the Oil Patch

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Over the last year one of the toughest sectors in the markets has been Energy.  After a long run something changed last summer and the sector began to underperform.  Earlier this year the space bounced when it looked like oil wanted to retrace some of the losses, but that attempt got thwarted in late April or early may.  Only to drive the sector back to new lows again.  This the noise around the industry is getting even louder about how bad the outlook is for the sector.  How low oil will drop from here, and how many will go out of business.  All of that could be true in due time, but if so, on our way there we are likely to see some violent bounces.  If that is not what is in store for the energy space, then this level of noise and the data we are about to look at could be trying to tell us now.  Each week in the SIN report I monitor sector breadth as well as relative strength to see how things are going.  Of course we all love strength, but I also like to watch for extremes in general and the Energy situation definitely qualifies.  The number of new 52wk lows in the space starting at the end of last year was eye-opening (accounting for much of the negative skew in the broad NHNL Differential).

Energy Sector NHNL Differential8-11-2015 Energy NHNL DIfferential

The first thing that caught my eye here was the divergence in the NHNL and new lows over the recent weeks; then looking back you see there is also a divergence from the December lows as well.  I haven’t studied how well this setup of long followed immediately by a short-term divergence works on breadth, but on RSI it is one of my favorite signals to look for a fast move.  But the divergences in themselves are the key.  Then I looked over to the Moving Average Breadth chart which is showing similar both long and short-term divergences in the %>20sma & %>50sma windows (not marked).

8-11-2015 Energy MA Breadth

It is also worth noting the %>200sma has been below the signal line for a long stretch. It can get longer, but going back on my charts to 1998 this is already spent the most time in the oversold zone than any other time period I can find.

8-11-2015 Energy McClellan

Next, the McClellan chart shows the Summation Index is not diverging, but it is at its lowest reading back to 1998.  So all of our long and Intermediate readings fit the washout definition; now we will turn to the short-term breadth Indicators to see what message they are giving.  First, sticking with the McClellan chart, note how the Oscillator has actually been spiking above zero recently and trying to make new highs here.  Next we look at its cousin, the Breadth Thrust Indicator which is sporting some of the same divergences we saw above.

8-11-2015 Energy Breadth Thrust

There are multiple ways you can draw the divergences here, but is suggests the selling pressure is waning.

8-11-2015 Energy Percent Days

The last breadth chart is the shortest term indicator which is the Percent Days chart.  This shows when both the volume and Advance Decline ratios are very skewed.  July showed a lot of energy selling, but can you see how the pressure died down about mid month and actually has flipped to more positive in August even though we have made new lows.  That is a very subtle divergence and change in character that this reading can help pick up.  You can see it occur at many other reversal points to the left.  It doesn’t tell you how long or far the move will go, but give a daily read on changes in pressure.

So, for those who buy strength, which is a fine strategy, this is not where you want to go fishing.  For those who like finding changes in character for either a major change in trend or just a fast retracement move when everyone gets one side of the boat, then this is where we have to dig in and see where the opportunities are. That is where the Relative Strength readings and segmentation comes in.  We all know Energy has some of the worst RS of the major sectors, so we will skip that list and dig right into the sector itself.

Energy Subsector Relative Strength8-11-2015 Energy SS RS

Here we can see how each Susbsector ranks and the price weighted performance of each segment along with the RS rankings gong back.  Refiners have been on top, but Oil Services is trying to make a move in recent weeks.

Another way we can look at this is with the ETF scan I use in the weekly report.  Below I have the list as of yesterday.  I also highlighted the ETFs that have moved over 20 RS points in the last 5 days which would qualify them as movers.  Green for gainers and orange for losers.

Energy ETF Relative Strength with Movers8-11-2015 Energy ETF wMovers markedFINVIZ link

Many can stop there as this sector has plenty of choices and focused products to choose from.  If you are not an ETF fan, then we need to drill a little deeper and see what we can find in the sectors. Today I am only going to concentrate on the Top and Bottom 25 in the entire sector and then look at some various RS Movers scans.

Top 24 Energy Relative Strength8-11-2015 Energy Top25 RSFINVIZ link

Bottom 25 Energy Relative Strength8-11-2015 Energy Bottom 25 RS

FINVIZ link

I would suggest sticking with the gainers side, but some may want to really dig deep or maybe do a pairs trade with the losers list.

Another way I like to spot opportunities is using the RS Movers scan.  Many of you know i do it on the entire market each evening, but I can also do precision drilling to make sure we don’t waste a lot of time and money on dry wells.

Energy RS Gainers8-11-2015 Energy RS Gainers

FINVIZ Link

Energy RS Losers8-11-2015 Energy RS LosersFINVIZ Link

For those who didn’t stop at the broad sector and want to focus on a specific subsector below are the each Subsectors RS Gainers.  Since I am looking for a potential move higher I am not including the RS Loser for each in this.  It is already a good bit to digest.  they are in the order of Relative strength in the list above

Oil & Gas Integrated, Refining & Marketing8-11-2015 Energy OGIntRefMkt RS GainersFINVIZ Link

Oil Equipment & Services8-11-2015 Energy OGSvc RS GainersFINVIZ Link

Oil & Gas Pipelines8-11-2015 Energy OGPipelines RS GainersFINVIZ Link

Independent Oil & Gas8-11-2015 Energy IndOG RS Gainers

FINVIZ link

Oil & Gas Exploration & Production8-11-2015 Energy OGExpProd RS GainersFINVIZ link

This is just the movers, you could also look at the strongest players in each subsector since this is such early stage action.  Lets see how things go and maybe I can do a follow-up with the strongest players in each segment.  Don’t forget, we don’t have a turn yet and this is still a very early read.  As always, price has to follow before action is warranted and even then it should be treated as an oversold bounce until the action proves to you it is growing into more.  If this analysis does pan out there will be opportunities to catch fast moves off the bottom, but with that comes with excess risk as well, so be ready and have a plan for it before you get involved.

Good Luck and I hope this helps!

If you like what you see, follow me on StockTwits or Twitter.
(All market data above are derived from Stockcharts.com, Esignal, and Reutersdatalink)
The information set forth here 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

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Dissecting The Markets with the Triple Play

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At the end of May my post Pick Your Poison was about looking at different timeframes and realizing choosing a time frame to focus on can dictate how you view the markets. I also discussed it was an exercise I like to each month.  I find it especially helpful after months like July that shake things up a bit and give us some extra volatility.  It can help ground my views by stepping back and moving from the longer time frame step by step down to the short-term.  So, let’s take a look.  If you are not familiar with my RSI charts you might take a quick peak at this RSI chart explanation video

Monthly8-1-2015 7-01-37 AM TP Monthly

On the monthly chart we have a steep trend in all 3 major ETFs we follow as they are well above the riding MA bands.  $IWM is least extended coming off the breakout from the flag that was 2014.  the July $IWM candle is a bearish engulfing pattern to watch in August, but using the blended candle approach with the last two months would give you a doji which goes well with the indecision we have seen so far this summer.  $SPY $QQQ had both been moving consistently higher until the last couple of months where they began to see more volatility creep in.  All three are still in strong RSI bull ranges.  $IWM is the laggard, but $SPY & $QQQ both are sporting new RSI Positive Reversals after closing higher this month.  All have relatively neutral CFG readings.  The trends are still up and don’t look to be in much danger at the moment.

Weekly8-1-2015 6-59-36 AM TP Weekly

The weekly level shows a little more of the volatity we have witnessed.  $IWM showing the most, $SPY looks more like a flag or box consolidation and the $QQQ aren’t showing any quit.  All three are coming off their MA Bands and in RSI bull ranges with none of the RSI or CFG overbought. Note how steady the trend in $QQQ has been while it has worked off the overbought readings of late 2013.  RSI works better as a trend indicator than moment if you learn to use it as such.  Weekly charts are consolidating but are still configured to favor higher prices.  no major damage to these charts yet.

Daily7-31-2015 9-31-26 PM TP Daily

It is in the Daily charts where we start to see the differentiation more. $IWM is currently the laggard and in a RSI bear range.  However, the $SPY and $QQQ both remain in bull ranges for now and the $SPY successfully held at the recent lows.  The volatility really starts to show up on this level showing the daily battle that was July.

65 minute7-31-2015 9-36-53 PM TP 65min

Drilling down to the 65min level we can actually see all of July’s trading activity 65 minutes at a time.  It was a bit of a roller coaster with the $IWM trajectory down while the $SPY $QQQ were more constructive.  $SPY was iffy for a while, but pulled it out in this last week. All three ended the month with RSI bull range shifts and trying to find support on now rising MA bands.  This is not a strong thrust so far so we need to keep an eye and see if RSIs can move above this week’s peaks for a more convincing range shift or will it fail and show we need more time to regroup before moving to and through the highs?  One good note here is CFGs are falling faster than RSI was on Friday which can be a positive.  More tentative shift back higher on this level;  Okay for now, but needs to build on it early next week to survive.

30minute8-1-2015 7-04-15 AM TP 30min

The 30 minute view shows all three are in RSI bull ranges, moving well off the lows. Friday ushered in a small pullback within the bull ranges.  The week closed with RSI pulling back within a bull range while CFG are getting oversold at or below zero and price is finding some support at the MA bands.  Until we lose the bull range the 30min level looks constructive and could be ready for another move out of the gate on Monday.

5 minute8-1-2015 7-05-22 AM TP 5min

As we get down to the very short-term, the 5 minute charts shows the Friday afternoon dropped blew through the bull ranges and are all now recovering back near the 50 level on RSI.  The trajectory is higher, but being in the bear range and below the MA bands we know a failure is very possible which could leave us with RSI Negative Reversals here showing this timeframe does need more time before it can shift back.  If a failure does happen and the RSI bear range holds it is certainly not the end of the world as this is a 5 minute view after all.  It could delay that move we talked about on the 30 minute for a while or outright negate it, but let’s get there first. The lower the time frame the more shifts we have and the less important they are unless that is the time frame you trade on.

As I said above after a month that can pull you in different directions and leave you a little uncertain, it can help to take a step back and drill down your time frames one by one and see what you can see which should allow us to better plan for the upcoming month.

Good Luck and I hope this helps!

If you like what you see, follow me on StockTwits or Twitter.
(All market data above are derived from Stockcharts.com, Esignal, and Reutersdatalink)
The information set forth here 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

 


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A Case for Utilities

7-27-2015 10-10-51 AM featured pic

Since peaking in February Utilities have been one of the worst performing sectors in the equity markets; at one point down over 17% at the lows.  There is a good bit of this that is tied to the fear rising rates coming sooner than later.  This has been one of the big clouds over most interest rate sensitive areas so far this year.  Most know I am in the camp of “lower longer” when it comes to the FED which would mean the year to date action in these areas could turn out to be a bit of an overreaction.

There are quite a few ifs that are necessary for this idea to play out, but we are already basing and a potential breakout in $TLT last week which makes me think it might start leaking over into these other sectors.  Real Estate and Utilities are two good places to look. Let’s start with Utilities using $XLU as our proxy.

From a Relative Strength Perspective the sector remains a laggard, but has began to come off the lows in recent weeks.

7-24-2015 Sector Proxy ETF RS Rankings 7-24-2015 EW Sector Proxy ETF RS Rankings

The sector has been mostly ignored in recent action, but when I was looking this weekend the dual view RSI chart caught my attention.
7-26-2015 8-22-47 PM XLU dv

Quickly, the two major trendlines jumped out.  On the weekly, the sector bottomed right at a 3+ year longterm trendline and reversed.  That trend line also happened to converge with a long term horizontal level as well (not marked). Then glancing over to the daily we can see that surge off the lows initiated a break of the daily trendline.  Shortly after testing that line again produced another bounce couldn’t withstand the broad market pressure leading to another even deeper trendline backtest which also corresponds with the 61.8% fibonacci retracement off the recent lows.  Friday’s doji right on that backtest hints we could see a change in direction near here.  If that were to happen it could be forming the right shoulder of a bullish Inverse Head and Shoulders pattern.  Switching views let’s see how other indicators are shaping up..

7-27-2015 9-20-34 AM XLU esig dv

Here the weekly chart is still in a rough spot below the middle Bollinger Band and potentially building a bearish flag, but the large MACD Histogram divergence also stands out if some positive price action materializes.  On the Daily here we can see the middle Bollinger Band has turned up even though price closed the week below it.  A remounting of this average would be a solid sign for more and further building that right shoulder.

One last chart I wanted to view was the Weekly moving average chart with OBV (On Balance Volume) to show how the participation has been during this pullback.

7-27-2015 8-09-12 AM XLU Wkly OBV

The OBV indicator shows participation in a long term uptrend and also breaking the short term down trend on the recent move off the lows.  We also see all the long term moving averages are still steadily rising and the 100sma is currently providing some support as it has many times previously during this uptrend.

To be sure, this scenario is still very early in its development and could fail to materialize at all, but there are some signs of life worth paying attention to.  For those who want to get in early, they can buy on a reversal candle and put a stop below the recent lows for a less than 4% risk.  A more conservative play would be to wait for the Inverse Head and Shoulder pattern to break and then use a close below the right shoulder as a stop.  Either way you have well defined levels to work with which is the key to a good trading plan. I think things are starting to align for some improvement and for those inclined you can enjoy the 3.7% yield while you are waiting.  There are various ETFs you can play the sector with, I chose $XLU for my example as it is one of the largest and most liquid in the space.

7-24-2015 Utilities ETF RS Rankings

Now I know some don’t like ETFs and would rather play the strongest names in the sector on any improvement.  That is fine.  below you will find my relative strength lists with FINVIZ links for the sector to help you in that search.  Don’t get stuck on the long list of the whole sector, once you find out where you want to fish, the subsector lists will likely provide more value.

Utilities Subsectors
7-24-2015 Utilities SS RS

Utilities Relative Strength7-24-2015 Utilities Sector RSDiversifed7-24-2015 UT DiversifiedSector RS

Diversified Utilities FINVIZ

Electric7-24-2015 UT Electric SS RS

Electric Utilities FINVIZ

Gas7-24-2015 UT GasSS RS

Gas Utilities FINVIZ

Water7-24-2015 UT Water SS RS

Water Utilities FINVIZ

On top of the interest rate sensitive nature of Utilities, they are also considered a defensive sector by all measures; and could also be a decent place to park some money if we do fall into a correction sometime this fall as many believe we will.  I am not fully in that camp right here, but it certainly doesn’t hurt to have some defensive ideas in the playbook, especially ones that look to be setting up for a move as well.

Good Luck and I hope this helps!

If you like what you see, follow me on StockTwits or Twitter.
(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

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Pick Your Poison: What Time Frames Do You Follow?

I like it when months end on a weekend, it gives me a chance to work my way from long to short term in the Triple Play Charts.  Here are all the time frames I watch on a regular basis in one fell swoop.

Monthly5-30-2015 10-14-12 AM TP Monthly

WeeklyTP Weekly

DailyTP Daily

65 minuteTP 65 Minute

30minuteTP 30 Minute

5 minuteTP 5 Minute

I like doing this exercise every month so I can reconnect with how if they are complimenting each other or sending a different message.  What do you see?

Good Luck and I hope this helps!

If you like what you see, follow me on StockTwits or Twitter.
(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

 


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Weekly Option RS Movers 5/19/2015

WO Equity RS Gainers5-19-2015 WO Equity RS GainersEquity Gainers FINVIZ

WO Equity RS Losers5-19-2015 WO Equity RS LosersEquity Losers FINVIZ

WO ETF RS Gainers5-19-2015 WO ETF RS GainersETF Gainers FINVIZ

WO ETF RS Losers5-19-2015 WO ETF RS LosersETF Losers FINVIZ

Good Luck and I hope this helps!

If you like what you see, follow me on StockTwits or Twitter.
(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

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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 Sectors5-15-2015 BSec Breath Thrust DashboardBasic Materials5-18-2015 Basic Materials SS BreadthThrust DBConsumer Discretionary5-18-2015 Consumer Discretionary SS BreadthThrust DBConsumer Staples5-18-2015 Consumer Staples SS BreadthThrust DBEnergy5-18-2015 Energy SS BreadthThrust DBFinancials5-18-2015 Financials SS BreadthThrust DBHealth Care5-18-2015 Health Care SS BreadthThrust DBIndustrials5-18-2015 Industrials SS BreadthThrust DBReal Estate5-18-2015 Real Estate SS BreadthThrust DBTechnology5-18-2015 Technology SS BreadthThrust DBUtilities5-18-2015 Utilities SS BreadthThrust DB

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.


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Special Edition: Weekly Option Relative Strength Movers

I thought I would share with you a scan I am personally working with for my clients shorter term opportunities.  This scan consists of 2 individual universes.  One made up all the stocks (333 securities) that trade weekly options the other with all the ETFs (61 securities) that have weekly options.  I then apply my relative strength calculation to rank each universe; and finally I scan for those which have moved more than 20 relative strength points from 5 periods ago.  As a reminder, my Relative Strength Calculation is a 3 month front weighted view that helps me spot changes in character of securities within the universe.  Whether or not there is a trade comes later in the process, but I have found this a great way to ferret out names with good potential for acceleration.  So I thought I would share it this week for all those who trade weekly options. It has been a nice tell so far in my studying it.

WO Equity RS Gainers5-1-2015 WO Equity RS Gainers Equity Gainers FINVIZ

WO Equity RS Losers5-1-2015 WO Equity RS Losers Equity Losers FINVIZ

WO ETF RS Gainers5-1-2015 WO ETF RS Gainers ETF Gainers FINVIZ

WO ETF RS Losers5-1-2015 WO ETF RS Losers ETF Losers FINVIZ

To this point I have only shared this scan with a very select few professionals, but I feel for a certain type of trader this scan can be invaluable on a daily and or weekly basis. I do some of this work for my clients as mentioned, but really don’t feel I am utilizing it to anywhere near it’s fullest potential, therefore I am seriously thinking about offering this scan on a daily basis as a monthly subscription.  If you think you might be interested in getting this every evening (potentially along with a few of my favorite looking charts) email me: gtlackey@gmail.com and let me know your thoughts.

Good Luck and I hope this helps!

If you like what you see, follow me on StockTwits or Twitter.
(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

 


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Sharpe as a Marble

4-19-2015 9-23-11 AM marblesGoing 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:

4-4-2015 6-20-43 PM Sharpe

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.

4-18-2015 1-21-51 PM risk stats

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:

Sortino wiki

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!

If you like what you see, follow me on StockTwits or Twitter.
(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

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Variable Soup: Do you have the right ingredients?

4-16-2015 1-31-36 PM mm mm good kidsI 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.

4-16-2015 1-45-47 PM pigeon holedUnfortunately, 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.

4-16-2015 1-42-29 PM Brunswick stewThen 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.

4-16-2015 1-32-27 PM quality soupSo, 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!

If you like what you see, follow me on StockTwits or Twitter.
(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

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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.

3-4-2015 1-56-29 PM TAN intraday

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!

If you like what you see, follow me on StockTwits or Twitter.
(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

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