TrendWatch Weekly

Shifting to the Dark Side… Shorting Equities

admin — Sun, 13 May 2012 00:03:48 +0000

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I’m definitely stepping outside of my comfort zone with this week’s topic, but with the equities markets in retreat right now, it’s time to think about making some money on the downside.

Regular readers know that my policy has been to move into cash as my winning stocks have finally ran out of steam, and I’ve generally stayed in cash until the tide returned to the upside. That served me well during the 2008 meltdown and through much of last summer’s volatile trend (mostly) downward.

But, cash, as you know, earns nothing, unless you play it against other currencies… a topic I’ll leave for another time.

This week I want to walk you through what it takes to live on the edge and try to make money as stock prices decline. I have three tactics in mind, and I’ll describe them below.

But first, let’s have a look at another dismal week in equities…

WEEKLY REVIEW… After a horrible one week performance last week, our chart shows a continuing turn for the worse… with all major indexes falling over the week. This drags the trend values for all of them onto the negative side. In short the odds of picking profitable stocks on the long side are not good. Of course, there will always be exceptions, but you’ll have to decide for yourself whether you want to fight the prevailing trends.

As usual the order of the markets is based on descending order of the (red) trend values, and the US major indexes continue to stay on top. Well, let’s say they performed less worse!

Just 34% of the stocks in the S&P/TSX Composite Index rose last week, reducing the total percentage of companies with positive trend values to 33%. Four of the 10 sector indexes have negative trend values now.

On the US side, the proportion of rising stocks in the S&P 500 Index last week was 35%, and the proportion of stocks with positive trends is now down to 37%. Only two of 10 sector indexes have positive trend values.

One thing I find very puzzling right now is that volatility (as measured by VIX or VIXC) haven’t really risen all that much. I consider 15-20 low on the “fear factor” indexes, as these things are frequently called. Right now the VIX is near 24 and VIXC is 20. Apparently those who buy put-option insurance aren’t too concerned about recent market declines yet.

Looking at the trend rankings of the 10 sectors in both the S&P 500 and the S&P/TSX Composite Index, the “least worse” performers have been pretty consistent for at least a month now… UTILITIES, CONSUMER STAPLES, CONSUMER DISCRETIONARY, and HEALTH CARE.

For more details on sectors and performance of stocks within sectors, visit the DATA & CHARTS workbook.

In our annualized growth rate (AGR) chart below we take the average weekly %-gain/loss in the trend values of all stocks and multiply it by 50 to get a ball-park annualized speed of price movement of the S&P/TSX Composite and S&P 500 stocks. It’s like a speedometer, but instead of miles or kilometres/hour in your car, you will be seeing %-gain (or loss)/year.

Why annualize? Well, it’s not essential, but it provides a fairly meaningful scale and we can use larger round numbers. The differences also stand out more. Your car’s speedometer could read miles (or kilometres) per minute, but the numbers would be pretty small and harder to interpret, like our gains per week numbers. Scaling up the time dimension just acts like a magnifying glass, as it does with your car’s speedometer.

You can see that last week’s performance in equities declined for both the S&P 500 trend benchmark and the S&P/TSX Composite Index trend. S&P 500 stocks are still outperforming the S&P/TSX Composite Index, however… something we’ll be discussing more below.

As you know, the ProfiTrend Portfolio (PTP) is based on my own holdings. It’s a way of sharing with you how well I’m doing relative to the averages, without giving away too many specifics and personal details. You can see from the chart that the AGR for my ProfiTrend Portfolio (PTP) is now at 79%, well up from the previous week, and still well ahead of the benchmarks.

I sold four more positions last week. I’ll be in sell more this coming week… due either to trend shrinkage or sharp declines from my price highs since purchase. These are my two key sell signals.

At the moment, however, the ProfiTrend Portfolio has these characteristics…

8 different holdings including an ETF (to short natural gas), a couple mid-cap consumer stocks, and a volatility play using VIX derivatives
Now 71% in cash with no intentions of going long on anything right now
Average of current trend values of all holdings, if annualized as in the chart above (i.e. 50 X Trend Value), is 48%
75% of the PTP holdings are now in US equities
Average gain among current holdings: 16% over an average holding time of 10 weeks

I strongly encourage you to track your own portfolio this way. It’s quite easy to do. For each of the stocks you’re holding, simply divide the percent gain to date by the number of weeks you’ve held that stock. Then take an average of those numbers and multiply by 50 (or 52 weeks if you’re a stickler for detail). Track that number weekly as we do in the chart above… comparing it with the benchmark(s) that you think are appropriate.

As I like to emphasize, if you’re not outperforming the average(s) all of the time, that could mean that you’ve gotten a bit lazy about dumping your losers and/or replacing them with equities that have more attractive trend and consistency values. Dropping losers before too much damage has been done is like dropping ballast from a hot air balloon. Without the extra weight, your portfolio will soar higher, as you can see from the PTP results above.

PLAYING THE SHORT SIDE… With all major North American indexes now trending lower, and all 37 of the country ETFs that we track trending lower too (see DATA & CHARTS workbook), it’s time to consider profiting from further declines. This is a brief primer on that topic.

Over the years, we’ve generally been conservative enough to take a “move into cash and stay there” approach in situations like this. That’s what I’ve been gradually doing with my own portfolio over the past month or so. You’ve been able to follow that in the previous section of our TrendWatch Weekly updates.

Now it’s time to consider shorting the markets for a while, so I’m going to run through three different alternatives. Those of you who routinely use short-selling as required won’t learn anything new here. This is mainly for those who are for the most part unfamiliar with the fact that you can make money with consistent downward trends too. But, proceed with caution. The risk is higher, since over the very long term stocks always move higher. Hence, there’s a bias that we’re fighting with any shorter-term strategy in the opposite direction.

Selling stocks and ETFs short. When you sell stocks or ETFs short, you’re essentially borrowing someone else’s shares and selling them immediately. It’s totally transparent to you (and the person whose shares have been sold), since your broker has many accounts under management and can freely “borrow” anyone’s portfolio holdings and move them around as they see fit. You granted permission for them to do that with your own portfolio in the fine print that you signed when you opened your account. If the person whose shares were borrowed decides to sell, your broker’s task is to quickly replace them (probably with yet another person’s stock) so the sale can go through. It’s all one big shell game.

That part shouldn’t concern you. You’ve sold someone else’s shares and expect to buy them back when the price drops (hopefully a lot). When you’ve closed your position, the shares go back into the “borrowing pool” or eventually to the original owner, by the time he or she wants to sell. And since you sold high and bought-back low, you pocket the difference.

Because you’re selling something that doesn’t belong to you, however, you have to have sufficient collateral in your account to cover your losses if the stock price goes up instead of down.

The worst case scenario is when there are a lot of short-sellers of a particular stock, and suddenly the price starts climbing significantly. In principle at least, there may not be sufficient shares out there to buy-back; and by the time there is, the price will be even higher… exaggerating your losses. I don’t have any hard data on how often this happens given today’s super-efficient computer systems, but you still read or hear about these “short squeezes” every now and then.

On the other hand, the ideal short sale is when the stock that you’ve borrowed and sold keeps falling to virtually nothing. Usually even before the shares hit zero, the company in question has declared bankruptcy and all shares are declared worthless. Hence, a nice fat profit and no concern about buying back shares to cover your short position.

In between these two extremes there are lots of opportunities to play the short-seller’s game. It’s typically best to short larger, more liquid companies’ shares to ensure that the buy-back will happen without a huge bid-ask spread. The same goes for ETFs.

Inverse ETFs. Since the popularity of ETFs is largely due to their simplicity (while offering diversity), it shouldn’t be surprising that you can now buy inverse ETFs that move up in value as the underlying index that the ETF tracks declines. Someone not willing to hand-pick individual stocks that are declining the fastest and most consistently, might just buy an inverse ETF on a major stock index instead.

Alternatively, if you want a bit more risk, and potentially more reward, find a more focussed inverse ETF that tracks an index that is falling faster than the general market indexes. Better yet, try to find one with leverage, so you’ll get a multiple of the price change as the index declines. Think about these alternatives in terms of risk/reward…

The (large-cap) S&P/TSX 60 Index is now declining at -0.8%/wk with 58% consistency. You could short an ETF based on that index (e.g. SXO) and expect as much gain as you see in the decline in the index until you buy-back. OR…
You could buy an HBP S&P/TSX 60 Bear Plus ETF (HXD) with 2X leverage. The HXD trend is +1.5%/wk with 54% consistency. It’s no surprise that +1.5% is almost exactly twice the inverse of -0.8% for the underlying index. OR…
Throw caution to the wind. We already know that the current decline in equities is global, so why not buy a Direxion Russian Bear 3X ETF (RUSS) that is currently returning 5.7%/wk with 68% consistency, or an Ultrashort MSCI Brazil Proshares ETF that is rising +3.7%/wk with 76% consistency, as the Brazilian equity index it’s based on declines.

All you need to do is keep in mind that our DATA & CHARTS workbooks have most of the info you need to get started in profiting from declining equities, as this global trend continues. And, if you don’t find enough data there, consider subscribing to one or more of our Premium Service databases. Every week, you’ll find a far bigger pond to fish in, when looking for downside profits. We have close to 250 Canadian ETFs and about 1200 US ETFs in our ETF Premium Service database. We send out the latest data out to subscribers weekly. Not surprisingly, all of the biggest winners at the top of the ranked performance list have “short” or “bear” in their title, along with “2X” or “3X”.

Put Options. I’m a big fan of equity, index, and ETF-based options too; but I like to keep my coverage to a minimum here. You really need to bring your investment skills up another big notch to fully understand what’s involved. You need to know a lot about probability theory, volatility, and time decay functions to really become a successful options trader. That’s certainly not for everyone; and leveraged ETFs can be a successful and (believe it or not) more conservative alternative than taking a course in options trading and practicing what you’ve learned.

But to be complete in playing the short-side, this choice can’t be ignored. When you buy an options contract, you’re paying for the right to buy (or sell) a certain number of shares in an underlying company (or index or ETF) over a certain period of time for a certain preset price. That’s the easy part.

Here’s an example. RIMM is trading at about US$12 right now. You can buy a RIMM Dec 12 Call option for $2.12 or a RIMM Dec 12 Put option for $2.28 today. You’d buy a call expecting the price to go up and a put if you expect the price to go down… so let’s concentrate on the second one.

Since 100 shares of stock are involved, you’re paying $228 for the right (but not the obligation) to sell 100 shares of RIMM for $12. A simple short-seller would just sell 100 shares of RIMM today at $12, but there would have to be enough collateral in his account to cover the borrowed shares.

The put option holder would be crazy to exercise his right to sell at $12 today, because he’d lose that $228 he paid for the contract. Besides, he doesn’t have the 100 shares of RIMM… unless he went out and bought them. RIMM would have to fall below $10 before he would break even (and then only if he had the shares to sell). But what if RIMM dropped 50% to $6. The short seller would likely buy back the shares sold short and claim a $600 profit (less commissions). Since $1200 collateral was required to do the deal, that’s a 50% profit.

The put option guy, without even buy shares of RIMM, would see the value of his contract grow from $228 to an absolute minimum of $600 (($12 sell price - $6 current price) X 100). If the stock reached $6 well before December expiry, the contract would actually be much more valuable. A large part of the price paid for an option contract is in its time value. So, at the worst case, the put-holder, if he simply sold his contract, would receive a 63% profit from putting up just $228. More likely, he might have bought 10 contracts originally for $2280, and collected a minimum of $6000 when selling the contract, for a profit of at least $3720.

So that’s how options speculators make money during a downturn. The combination of picking the strike price and the time duration for the put option can lead to an almost infinite variety of leverage possibilities. Don’t go there unless you really know what you’re doing.

I’ve used a stock example (RIMM), since you might use our trend and consistency data to help choose your option candidate, but you can do the same thing with major stock indexes. In fact some investors prefer not to sell off all or most of their stocks during a decline like we’re seeing right now. Instead, they’ll buy put options on a large market index like the S&P 500 or the S&P/TSX Composite Index in sufficient quantities and with enough leverage to offset the losses in their holdings. Because of the high leverage potential, it is just like insurance. They put up a relatively small amount of money to protect themselves from a catastrophic loss like a market crash. Of course, if the catastrophe doesn’t happen, they tend to lose the premiums they’ve paid.

So, there you have the major choices available to you, if you want to keep your money working for you during a downturn. A final alternative, I suppose, would be to find another investment class that rises as stocks fall. Right now, I would welcome any suggestions along those lines, but I don’t see any… unless it’s something exotic like fine art collecting, or selling endangered species on the black market.

NOTE: The following sections often remain unchanged for several weeks. We’re now using a symbol to alert you of updates when they occur, or when new sections are added. That might help you skip over sections that you’ve read before. The flag will be removed two weeks after the new material has been added.

STATE STREET INVESTOR CONFIDENCE INDEX (APRIL 2012)… The global SSICI dropped 3.9 points in April after rising 5 points in March.

We like the SSICI since it’s not just based on a snapshot of opinion. State Street tracks actual money flows among institutional investors from low risk assets (bonds) to high risk assets (stocks) and vice versa. More equities = more confidence.

The more interesting results are almost always in the regional differences. The Europe index held steady from March and is clearly favoured from a risk perspective over the other regions. I wonder why we don’t hear about that on BNN or other media that follow global equity markets. The 7.5 point decline in the Asia index over the past month is largely responsible for the global index decline.

The next SSICI monthly update will be released on May 29.

PREMIUM SERVICES… Join the ranks of our power traders by subscribing to one or more of our Premium Services.

Our premium subscription services provide investors with much larger databases of stocks than you’ll find at our web site; and the weekly updates are delivered conveniently via email attachments. Trend and consistency values for all stocks and ETFs are provided for three time frames… 10-weeks, 20-weeks and 40 weeks using our relative trend analysis™ (RTA) approach. Check our Premium Services page for more details on the data fields included in each database.

A US Equities Database is now publicly available with nearly 5000 stocks, complete with trend and consistency data. We also have a new “.UN” database of Canadian income trusts, REITs and Master Limited Partnerships (MLPs). Aside from the usual trend and consistency data for 10, 20 and 40 week timeframes, we’ve included annualized yield information, since these vehicles are currently delivering 8% per year on average on top of any capital gains that you’ll enjoy by picking those with consistent positive trend values. In addition there is a field for general type (REIT, MLP, other) and a more specific label for the nature of the business (financial services, real estate, industrial products, consumer goods, etc). We’re offering a one-year subscription of weekly updates for just $49.95. (Sorry, no pay-as-you go monthly option on this one, since the price is already so low.)

BOOK STORE… Investors might appreciate our recommended book section which takes the form of an Amazon mini-book store. Buy for a fellow investor or treat yourself to some excellent educational reading.

MICRO-BLOG(S)… Follow us on Twitter if you’re so-inclined. A typical “tweet” will draw attention to an interesting perspective on the markets, and include a link to the source. A brief opinion might also be included.

Since we’ve now consolidated our three web sites into one, we’re simplifying our Twitter presence as well. Previously, tweets on the Canadian markets were obtained via @TSXtrendwatch. For US equities it was @USequitytrends, and for ETFs @ETFtrendtracker. We also had a Twitter feed for income trusts… @IncTrustTrader.

Those will all continue for a few more weeks, but if you follow @ProfiTrend, you’ll receive tweets on all of these topics, plus some more generic investing posts… all in one place.

If Twitter isn’t your thing, the same regular intra-week updates are routed onto a “badge” at the ProfiTrend Advantage web site. (Badges are info boxes with the most recent tweets.)

On average, there are typically 3-5 of these postings weekly. Because many are quite timely in nature, you won’t see them revisited in our weekly update. For that reason alone, we recommend that you follow us on Twitter or visit http://PTA.ProfiTrend.com frequently, if you prefer that approach.

COMING SOON… Here are a few topics I intend to cover in 2012 (but feel free to offer other suggestions)…

More chart chat… they’re eye-catching and look scientific, but often they’re a wolf in sheep’s clothing
What’s “normal”?… is a -4% decline in a single week a lot? is an annual 10% gain in your portfolio good, bad or just average? It’s good to have some benchmarks
Back-testing… you’re wasting your time!

VIDEOS… Whenever we find videos on various investment topics that may be of interest here, we add them to our video jukebox. Be sure to check that page now and then to take in an interview or commentary from some knowledgeable analysts.

MAILING LIST… If you’re not already receiving notifications of TrendWatch Weekly updates by email, be sure to get yourself on our distribution list using the Subscribe button at the top.

CONTACT… Contacting us is as simple as sending an email to info@ProfiTrend.com. Put as much info in your message subject field as possible, before elaborating on the problem. Overly simple subject titles like “Problem Report” may not get noticed. Something like “Sector chart is missing in the US Equities Data&Charts page” will stand out.

Charting the Present: A Floating Forecast Approach

admin — Mon, 07 May 2012 17:22:23 +0000

Far too much attention is paid to forecasting what the equities markets will do over the long term… as if any of these forecasts will be accurate (except by chance). With relative trend analysis™ (RTA) , our objective is to understand the present as well as possible. If that is attainable, long-term predictions are unnecessary, and rear-view looks into the distant past are irrelevant. With the right discipline profits will simply flow in until they don’t anymore. Then it’s time to sell and repeat the process.

Part of understanding the present, however, is in looking at all the most recent data thoroughly, and that sometimes means looking at the same numbers from different perspectives. That’s what I’ll be discussing below.

But first, let’s have a look at last week’s devastation.

WEEKLY REVIEW… After showing signs of improvement last week, our chart shows a sharp turn for the worse… with all major indexes falling over the week. This drags the trend values for all of them except the DJI onto the negative side. In short the odds of picking profitable stocks on the long side are not good. Of course, there will always be exceptions, but you’ll have to decide for yourself whether you want to fight the overall trends.

As usual the order of the markets is based on descending order of the (red) trend values, and the US major indexes continue to stay on top.

Just 25% of the stocks in the S&P/TSX Composite Index rose last week, reducing the total percentage of companies with positive trend values to 36%. Six of the 10 sector indexes have negative trend values now.

On the US side, the proportion of rising stocks in the S&P 500 Index was even lower… 16%, and the proportion of stocks with positive trends is now down to 44%. Only three of 10 sector indexes have positive trend values.

Looking at the trend rankings of the 10 sectors in both the S&P 500 and the S&P/TSX Composite Index, we’re seeing CONSUMER DISCRETIONARY, CONSUMER STAPLES,, UTILITIES and HEALTH CARE are near the top (although in somewhat different orders).

For more details on sectors and performance of stocks within sectors, visit the DATA & CHARTS workbook.

As you know, the ProfiTrend Portfolio (PTP) is based on my own holdings. It’s a way of sharing with you how well I’m doing relative to the averages, without giving away too many specifics and personal details. You can see from the chart that the AGR for my ProfiTrend Portfolio (PTP) is now at 47%, down from the previous week, but still well ahead of the benchmarks.

I stayed on the sidelines last week… no buy or sell orders. The latest trend numbers for several of my holdings have slipped sharply over the past week into negative territory. Consequently, I’ll be in sell mode this coming week… due either to this trend shrinkage or due to sharp declines from my price highs since purchase. These are my two key sell signals.

At the moment, however, the ProfiTrend Portfolio has these characteristics…

13 different holdings including an ETF (to short natural gas), a couple mid-cap consumer stocks, and an assortment of US equities, including a leverage tech ETF and a volatility play using VIX derivatives
Now 54% in cash, and looking to add more US equities
Average of current trend values of all holdings, if annualized as in the chart above (i.e. 50 X Trend Value), is 44%
69% of the PTP holdings are now in US equities, and this percentage will likely grow in light of the continuing superior performance of US equities and the strong Canadian dollar
Average gain among current holdings: 9% over an average holding time of 10 weeks

PAST, PRESENT, “FUTURE”… Baseball great, Yogi Berra, is also know for many whimsical quotes that often had a grain of philosophical truth to them. One of my favourites is Sometimes you can see a lot just by looking”. On first reading, it just seems silly. After all looking and seeing are the same thing right?

Actually, they’re not. Looking is taking in what’s in front of your eyes (what psychologists call sensation, whether applied to hearing, seeing, etc.). Seeing has more to do with comprehending what we are looking at. To use a simple example, you might look at three interconnected lines, but your brain sees the letter “H”. Psychologists refer to this as perception (again generally applied to all senses). Sensation is taking in the raw data; perception is attributing meaningful interpretations to that data.

Looking at charts based on stock price changes over time, is not that different… but somewhat more complex. That’s why it often helps to chart price data in different ways to see more than you’d see with a a simple historical price line-chart.

Suppose a brand new car comes to market. It’s doubtful that you’d want to buy one based on a single two dimensional photo of the back end of the car. You’d want to see it from all angles, sit in it, look under the hood and check out the trunk space, etc… not to mention taking it for a test drive. These are all ways of using our senses to building a meaningful perception of the car that will sway us one way or another in terms of whether to buy or not. Shouldn’t that be the case with stocks too?

Along similar lines, some car buyers may be biased toward appearance… others to speed and handling. The fact that there are individual preferences really doesn’t matter, because ultimately you want a car that suits your own life style.

That’s why we don’t offer hard and fast rules for how you should pick your stocks. Why should we… when every investor should have their own set of priorities in finding stocks that suit their trading style?

Our trend and consistency data will tell you something about the speed of the vehicle and how smooth the acceleration seems to be, but you’ll have to decide for yourself how high that priority is in meeting your investment goals.

Having said that, we can still offer you tips now and then in gaining multiple perspectives on the data you have available to you, and talk a bit about how to use those perspectives. I’ll walk you through one example today, based on the relative performance of the ten high-level industry sectors, which have sub-indexes in the Canadian S&P/TSX Composite Index list of companies.

As I go through this, keep in mind that relative trend analysis™ (RTA) is a “today-centric” form of analysis. We obtain the best possible view of current trends by using and weighting the most recent price moves up to today, in anticipation that those trend values will persist into the future… if only for a limited, unpredictable period of time. By looking for positive trends with high consistency, we like to say that “a consistent trend is less likely to bend”… and that has been our experience over many, many years now.

Although we don’t make predictions about the duration that a trend will persist, there’s no reason why you can’t extrapolate from today’s trends if you want to, as long as you don’t really believe that the end value of the forecast will be the same as you repeat the exercise from week to week.

Many investors really want to believe in the gurus who will predict something like “the Dow Industrials will reach 15,122.34 at the close of trading for 2012”. Even if this person was correct to the second decimal point, it would obviously be total coincidence! No one can make predictions like this that are even remotely accurate more than a lucky once or twice in a lifetime. And, yet those are the analysts that we see every day on BNN or CNBC or read about in the business press. They’re paid to pull numbers out of their ass and sound authoritative while doing so. Amazing! And, they wouldn’t be there, if they weren’t popular with viewers. That’s what worries me!

So, let me show you how to make a floating-forecast… just in case you’re suddenly invited to be interviewed on BNN or CNBC. But, before you quit reading; I do have a method to my madness, so bear with me. I’m going to show you how even a floating-forecast can provide you with a different way of looking at the same data to broaden your perception of what’s happening and where the markets might be going next.

You’ve already seen a variation on the “floating-forecast” notion in the form of the AGR chart I use every week. The benchmark trend values are annualized to show where they might end up in 50 weeks based on current trend values. The PTP bar is also annualized, but based on the actual average weekly returns on the stocks in my portfolio. It’s what I would earn looking a year out if the average trends persisted indefinitely. Obviously they don’t, so this too is a dynamic forecast… changing from week to week. The key thing is not what the real value is after a year, but that the real profit 50 weeks later is higher than what has been achieved by the market indexes. That’s again part of the “relative” in relative trend analysis™ (RTA) .

In the chart below the black bars show the year-to-date change in the ten TSX sector indexes over the past 18 weeks. The red bars extrapolate the current weekly trend values for the same ten sectors out over the next 18 weeks (by simply multiplying by 18).

Since the sectors are sorted based on the year-to-date results, it’s clear to see that HEALTH CARE, CONSUMER DISCRETIONARY and CONSUMER STAPLES have had excellent returns, given how early we are in the year, and several others have positive returns too. As a reference the S&P/TSX Composite Index is off -0.7% year-to-date, so being in the right sectors would have made a big difference. The trend data that we provide weekly should have led you into those out-performers earlier in the year.

So, what can we learn from our floating-forecast? Well, first of all, we don’t want to take the absolute values seriously, as I mentioned earlier. They will be different if we repeated the exercise next week; but then the year-to-date numbers will be too. The past changes just as fast as the future changes when you apply a consistent mathematical methodology; so we need to constantly base our trading decisions on the present.

It’s always tempting to hop on board with the leaders in a year-to-date analysis… hoping that they will continue to be winners. However, that’s not a good idea in general, and in this case that’s where the floating-forecast bars come in. Totally ignoring the absolute values, we’re seeing six of the ten sectors with negative trend values. We’re seeing two more in retreat relative to year-to-date results, and two where there’s actually a bit of improvement when comparing floating-forecast vs year-to-date… CONSUMER STAPLES and UTILITIES.

What this tells me is that, as of this past weekend, we can’t expect the same performance in HEALTH CARE and CONSUMER DISCRETIONARY that we’ve seen previously this year, but that there could still be some opportunities there short-term.

The next thing that’s currently pretty obvious is that the sectors that have performed poorest year-to-date appear to be destined to get even worse… again based on this week’s floating outlook.

If you like this particular way of combining the recent past with the potential future, I encourage you to put something like this together for yourself. Rather than taking a year-to-date approach, you might track the previous 10 weeks, and do a floating-forecast on the next 10 weeks.

If you’re not that interested in sector rotation, you might just do something similar with the stocks in your portfolio. I rely on numerical signals to sell, but having a nice visual like that might help you put things in perspective, so that you’re not holding your losers too long, and hanging onto your winners.

These things are pretty easy to put together if you have some basic Excel (or other spreadsheet) skills. You might also plot or display consistency as part of the floating-forecast display. Consistency can be interpreted as a degree-of-confidence in the forecast. In the chart above, for instance, the consistency values (not shown) are mostly in the 20%-40% range, but MATERIALS stands out with a 68% consistency value. For me, that would be a very strong reason to avoid mining stocks until this situation changes.

So, there you have it… another way of looking at the same numbers we report weekly in order to see a bit more, because we’re looking from a different perspective.

STATE STREET INVESTOR CONFIDENCE INDEX (APRIL 2012)… The global SSICI dropped 3.9 points in April after rising 5 points in March.

The next SSICI monthly update will be released on May 29.

PREMIUM SERVICES… Join the ranks of our power traders by subscribing to one or more of our Premium Services.

Our premium subscription services provide investors with much larger databases of stocks than you’ll find at our web site; and the weekly updates are delivered conveniently via email attachments.

Trend and consistency values for all stocks and ETFs are provided for three time frames… 10-weeks, 20-weeks and 40 weeks using our relative trend analysis™ (RTA) approach. Check our Premium Services page for more details on the data fields included in each database.

A US Equities Database is now publicly available with nearly 5000 stocks, complete with trend and consistency data.

We also have a new “.UN” database of Canadian income trusts, REITs and Master Limited Partnerships (MLPs). Aside from the usual trend and consistency data for 10, 20 and 40 week timeframes, we’ve included annualized yield information, since these vehicles are currently delivering 8% per year on average on top of any capital gains that you’ll enjoy by picking those with consistent positive trend values. In addition there is a field for general type (REIT, MLP, other) and a more specific label for the nature of the business (financial services, real estate, industrial products, consumer goods, etc). We’re offering a one-year subscription of weekly updates for just $49.95. (Sorry, no pay-as-you go monthly option on this one, since the price is already so low.)

The annually updated seasonality investing books, Brooke Thackray’s 2012 Investor’s Guide and Jeff Hirsch’s 2012 Investors Almanac, also double as desk calendars, so they’re particularly attractive gifts. As with most “calendars”, they get discounted after year-end, so they’re bargains right now.

MICRO-BLOGS… Follow us on Twitter if you’re so-inclined. A typical “tweet” will draw attention to an interesting perspective on the markets, and include a link to the source. A brief opinion might also be included.

Although we’ve now consolidated our three web sites into one, you can still choose to follow just one or two of our separate Twitter feeds if you like. For tweets on the Canadian markets follow @TSXtrendwatch. For US equities follow @USequitytrends . For ETFs follow @ETFtrendtracker. For income trusts it’s @IncTrustTrader.

If one Twitter feed is your preference, follow @ProfiTrend , which includes the tweets from all of the others, plus some more generic investing posts.

If Twitter isn’t your thing, the same regular intra-week updates are routed into “badges” at the ProfiTrend Advantage web site. (Badges are info boxes with the most recent tweets.)

On average, there might be 3-5 of these postings weekly, and typically they won’t find their way into our weekly update. For that reason alone, we recommend that you follow us on Twitter or visit http://PTA.ProfiTrend.com frequently, if you prefer that approach.

COMING SOON… Here are a few topics I intend to cover in 2012 (but feel free to offer other suggestions)…

More chart chat… they’re eye-catching and look scientific, but often they’re a wolf in sheep’s clothing
What’s “normal”?… is a -4% decline in a single week a lot? is an annual 10% gain in your portfolio good, bad or just average? It’s good to have some benchmarks
Back-testing… you’re wasting your time!

MAILING LIST… If you’re not already receiving TrendWatch Weekly by email for free, be sure to get yourself on our email distribution list using the Subscribe button at the top.

Tools, Tips & Tricks for the Self-Directed Investor

admin — Mon, 30 Apr 2012 23:43:16 +0000

Terms like “do-it-yourself investor” or “self-directed investor” don’t really do us justice as market-beating entrepreneurs. Someone needs to come up with a better title. Any suggestions?

That aside, this week I want to talk about our “tools of the trade”. Our goal should be to maximize whatever time we have available for our trading activities on decision making, while minimizing the time we spend doing routine data gathering, number crunching and summarizing. I’m going to share a few of my favourite tips, tricks and tools along these lines; and perhaps you’ll offer up some of your own through the Comments area at the bottom.

But first, let’s have a look at last week’s action.

WEEKLY REVIEW… The chart looks good, doesn’t it; after seeing too many black bars extending to the left of zero over the past month. As usual the order of the markets is based on descending order of the (red) trend values, and the US major indexes continue to stay on top.

An impressive 65% of the stocks in the S&P/TSX Composite Index rose last week, raising the total percentage of companies with positive trend values at 54%. Six of the 10 sector indexes have positive trend values now.

On the US side, the proportion of rising stocks in the S&P 500 Index was even higher… 75%, and the proportion of stocks with positive trends is now up to 68%. Seven of 10 sector indexes have positive trend values.

Looking at the trend rankings of the 10 sectors in both the S&P 500 and the S&P/TSX Composite Index, we’re seeing some divergence now, although there are still some strong commonalities. ENERGY, TELECOMMUNICATION SERVICES, and MATERIALS are the bottom three sectors in both countries, and CONSUMER DISCRETIONARY, FINANCIAL SERVICES, UTILITIES and HEALTH CARE are near the top (although in somewhat different orders).

For more details on sectors and performance of stocks within sectors, visit the DATA & CHARTS workbook.

As you know, the ProfiTrend Portfolio (PTP) is based on my own holdings. It’s a way of sharing with you how well I’m doing relative to the averages, without giving away too many specifics and personal details. You can see from the chart that the AGR for my ProfiTrend Portfolio (PTP) is now at 69%, down from the previous week, but still well ahead of the benchmarks.

I stayed on the sidelines last week… no buy or sell orders.

That leaves the ProfiTrend Portfolio with these characteristics…

13 different holdings including an ETF (to short natural gas), a couple mid-cap consumer stocks, and an assortment of US equities, including a leverage tech ETF and a volatility play using VIX derivatives
Now 53% in cash, and looking to add more US equities
Average of current trend values of all holdings, if annualized as in the chart above (i.e. 50 X Trend Value), is 89%
69% of the PTP holdings are now in US equities, and this percentage will likely grow in light of the continuing superior performance of US equities and the strong Canadian dollar
Average gain among current holdings: 12% over an average holding time of 9 weeks

TOOLS. TIPS, TRICKS… The fun part of trading stocks and other financial instruments is the challenge of picking those than will deliver above-average returns. Then it’s just a matter of watching the data that accumulates (in your profit column) to prove that you were right. The not-so-fun part is the drudgery of accumulating the data and information you need to make your stock-picks, the processing required to obtain the indicators you like to follow, and the tracking that happens after the “buy buttons” have been pressed.

I’m sure that we’ve all found ways of simplifying or automating the boring stuff; and I’m going to share some of mine here today. None of these are trade-secrets in any sense, and you may be doing the same thing already. If you think that you have some even better solutions than what I’m about to suggest, let’s hear about them! I’ll accumulate the “best of… ’s” and share them in another edition.

Everything I have to say today is mainly about doing things faster and more efficiently. The tips and tricks generally fit in one of these categories: finding and downloading the numbers you need, keeping track of text documents and charts for future reference, and processing your data via spreadsheet or technical analysis software. I’ll just offer a few thoughts in each area, but those might stimulate you to pursue more along the same lines. And, everything I have to share with you today is free or close to it.

Data Sources…. I’ve been a big fan of Yahoo! Finance (http://finance.yahoo.com) from the start, and I have yet to find a better free data source where you can easily download data that are spreadsheet compatible. You create portfolios of up to 200 equities each and can specify which fields (financial statistics) are displayed from a huge list of possibilities. If you’re Canadian, avoid the “.ca” version of this site. You’d think that they’d have additional info on the Canadian markets, but instead it appears that they’ve simply stripped out a lot of things that are in the “.com” version to Canadianize it. Hence, it has less value, not more.

Globe Investor ( http://GlobeInvestor.com ) is another good choice. While this is a Canadian source, you’ll find all US equities at your disposal as well. Just go to the Watchlist page. If you already have Yahoo! Finance portfolios, you can import them into Globe Investor… where you also have the 200 symbol limit for each portfolio/watchlist. Exporting the data to your computer from these watchlists is not quite as easy as with Yahoo!, but your downloaded files will contain every field of financial data that Globe Investor has… in short dozens of indicators that you can incorporate into your analyses.

I’ll also mention Stockwatch ( http://www.stockwatch.com ). You can get a free trial, but a beginner-level account will cost you just $5/month. For that $5, though, you can download all of the stock price data from all of the North American exchanges…. with no limit on the file size (unlike the two I’ve already mentioned). The downside is that the rest of the information at the site is quite limited, and your downloads contain price information… no fundamentals or other data. And, don’t expect anything whatsoever by way of user support.

Before leaving data gathering, let me introduce you to the web-query, in case you’ve never heard of the term. I assume that if you’re doing your analyses with a spreadsheet program, it’s likely to be Microsoft Excel (the almost-monopoly leader in spreadsheets). That’s where you’ll find the web-query tool.

First, a bit of background… Sometimes you’ll go to a financial web site and find regularly updated data in table format… perhaps a list of ETFs with numeric or text fields that you can’t find in Yahoo! or elsewhere. Quite often there is no download capability to be found there, and attempting to cut-and-paste the table into a blank Excel page just doesn’t seem to work. That’s where the web-query comes in. You essentially mask off the area of the web page that contains the table of data you want (from within Excel) and create a reusable query. When executed the data from that web page appear on your spreadsheet page. Re-run the query a day or a week later, and all of the latest data are pulled into your spreadsheet with no additional effort. As long as the creator of the original web page doesn’t change the layout, you essential have one-click access to the latest numbers right inside your spreadsheet. No downloading files and reading them into Excel at all! Excel jumps onto the web and pulls the data in.

When this works, it works remarkably well. The Windows version of Excel does this more elegantly than the Mac version (from a user-interface perspective), but both will do the trick.

It’s surprising that the web-query feature isn’t more well known and appreciated. Perhaps this is because Microsoft is implicitly endorsing copyright violations with respect to the data source. Who cares? It can be very useful.

Processing… Here again, I’m going to assume that you’re a spreadsheet investor, and not using one of the many high-priced technical analysis software packages (where you typically also pay subscription fees for access to historical data).

Excel tips & tricks could easily be a chapter unto itself, but I’ll just refer you to some functions and features that you may not be using already.

At this point I’ll assume that you’ve downloaded (or web-queried) the latest numbers into your Excel workbook. You’ve no doubt got the formulas for all of your calculations in there too. I personally like to keep the data I’ve downloaded in a separate sheet from the calculations, so I don’t accidentally paste data over the formulas that I’ve painstakingly put in place. On the other hand it’s good to have both sheets and others on the same topic in the same workbook.

One of my most heavily used functions is VLOOKUP (or its flip-side sister, HLOOKUP). If you’re not already using this regularly, learn about it and what it can do to make your data processing much easier. If you’re familiar with the concept of a relational database, VLOOKUP/HLOOKUP are the functions that can make this happen in Excel.

What you’re doing with this function is looking-up extra information, typically in another worksheet. The format is as follows…

=VLOOKUP(symbol, sheet!range, column)

Let’s say that you have a list of symbols of stocks for which you’ve built formulas to calculate your indicators. You have additional columns for the company name, industry, the latest stock price, and let’s say trend & consistency data that you’ve extracted from our web site or one of our premium service subscriptions. So, you may have two or three worksheets (ideally in the same workbook).

Instead of copying values across from one sheet to your master calculation sheet, you use VLOOKUP. If you have a sheet with just symbols, names and industry codes as three columns, VLOOKUP(symbol, NameSheet!$A$1:$C$1000,2) will pull in the name for the symbol and VLOOKUP(symbol,NameSheet!$A$1:$C$1000,3) will find the industry code. Similarly, you might pull in the trend numbers from a different sheet… e.g. VLOOKUP(symbol, TrendSheet!$A$1:$C$1000,2) Clearly, you wouldn’t use “symbol” literally. You’d reference the cell that contains the symbol (e.g. A1). Then you’d copy down the formula in your master sheet for all the rows that contain your symbols. Change the symbols in your master list, and everything else gets imported as required.

If you do a weekly analysis as we do, you may want to save your files with a date as part of the file name, in case you want to refer back to what your calculated numbers were at some point in the past. Or, you could use our preferred method of keeping the historical record in the same workbook. That way you’re just updating the same workbook every time.

Most likely your master sheet where your calculations are done will have symbols at the beginning of each row, and bits of data, plus your calculations as the columns. In your historical data sheet, however, you’ll want the dates as your rows and the various bits of information that you want to save from week to week as your columns. One way to do that is to copy any column of results you want to keep and paste it into the historical sheet using the transpose option. That turns a column into a row. Your column headers will have the symbol names for future reference.

Where this will become a problem is if you like to sort your rows in your master sheet to find the winners based on your calculations. You have to be sure that they’re back in the original order before you do your copy/paste(transpose).

Or, better yet, you can use HLOOKUP the same way I described using VLOOKUP, except in the other direction. You’d stick your HLOOKUP formulas in the 2nd row under your symbols (column headers). Each formula will extract the latest info that you want to save from your master worksheet for the symbol above it. With each update, you’d begin by inserting a new blank row 3 in your historical sheet, which will shift all previous data down one. Then copy row 2 (which has the results of the previous week’s HLOOKUP results), and Paste Special using the Values option into the new blank row 3. That turns formula derived data into raw numbers. Repeat all this as often as required.

If this seems complicated, just take your time and get comfortable with using these tricks at your own pace. Once you’ve established a regular routine, your effort will be minimal.

To take all of this to the next level, you might consider learning how to create macros. You can learn the macro programming language or simply use Excel’s Macro Record feature. If you’ve sort of followed the procedure I’ve described so far, you’ll know that I’m basically starting by shifting the previous week’s calculations down one row (converting formula look-ups to raw numbers). Then I bring in the new weekly data and the calculations that I’ve programmed are automatically executed.

To create a macro for this repetitive behaviour, I basically hit the Macro Record option, inserted a key-combo for activation purposes, and essentially say to Excel “watch what I do”. I go through the steps I described above manually, and when I’m done I click Stop. Excel converts my actions into a macro (using it’s programming language) and stores it. From that point onward, all I do every week is hit my key-combo (command-alt-n in my case) and all of the steps I used to do manually are executed automatically. Believe me, it’s well worth the time to learn some of these Excel tricks.

Tracking… I’m not going to add much to this topic, since I have a bit of a guideline under my weekly AGR chart above, and I’ve described a tracking spreadsheet for your portfolio before ( http://profitrend.com/tsx_blog/?p=306 ).

I can’t emphasize enough that portfolio tracking is probably even more important than stock-picking. You can be a wizard at picking winning stocks; but if you don’t have an exit strategy built into your portfolio tracker, you can have stocks which doubled from your purchase price, then dwindled back down to become losers because you didn’t have an exit strategy. Look back to the “Coping with Loss…” edition two weeks ago, if you missed it.

The Social Side… Some of us who trade our accounts from a home office don’t feel a need for having others approve of our investment picks, or a strong desire to stand on a soapbox and crow about our portfolio profits and big winners; but I think we are a minority. There is a social element that is clearly craved my many… especially the most active traders. There’s nothing wrong with that, and there are some interesting outlets for sharing your thoughts with others. They are generally called investment forums message boards (the older term).

You may already have your favourites (and I’d like to hear about them), but here are three, that I find interesting for quite different reasons.

Stockhouse (http://www.stockhouse.com )… This is probably one of the oldest ones based on the original (pre-browser, text-only) message board concept. It’s evolved of course, and now includes blogs, regular columnists, and other features. All of the original investment message boards were all about specific stocks, so the ticker symbol was always used as a screen. That’s still true. That way you can find out what all Stockhouse users think about AAPL for example. I’m still a little surprised that there is far more interest in other people’s opinions or specific stocks than in sharing trading tactics. They think fish… I tend to think fishing.

StockTwits (http://stocktwits.com, )… StockTwits brings the old fashion message board into the 21st century via Twitter technology. We’re still talking mostly short comments on individual stocks, but with Twitter’s specific character-limit. Once you’re registered, you’ll see a stream of comments that runs by almost faster than you can read them. This thing is popular! Because it piggy-backs on Twitter itself, StockTwits has a few rules so that it can tell a StockTwits contribution from something you’ve posted for general Twitter consumption. You just add a “$” in front of a ticker symbol somewhere within you post and your comment is channelled to all StockTwits followers. I rarely comment on specific stocks, so I use one of their other alternatives… putting “$$” at the end of my comments. If you’re already following me on ProfiTrend or one of our other Twitter accounts, you’ve probably noticed the “$$” already. That means it goes into the StockTwits stream as well. I prefer to share links to interesting research I’ve read, instead of throwing out a comment on whether $AAPL will reach $1000 this year. It’s an individual difference thing. As with Stockhouse, most people are stock-centric in these social media.
Seeking Alpha ( http://seekingalpha.com )… Seeking Alpha, in my view, is more of an investment hub… taking the message board idea to the next level. They have a team of paid writers, plus a second string of bloggers who contribute for free. There are still places for random comments on specific stocks and issues, but you’re more likely to find small pieces of research conducted by independent individual investors like you and me. There isn’t a lot of quality control, but I believe that some of these folks have put a lot of effort behind the results they report, so it’s hard to believe that they would deliberately attempt to deceive readers.

Miscellaneous Goodies… Not all tips and tricks fall into the categories above. Some are just general tools that can be just as useful for your stock trading activities as they can be elsewhere. Bookmarking your favourite investment sites should go without saying, but if you haven’t tried Evernote yet, download it soon ( http://evernote.com ). Sorry, Windows users… this one is Mac only.

For years I was content to essentially scrapbook bits and pieces of investment research and general info that I knew I’d want to refer to again. I’d snip charts and articles out of newspapers and magazines and glue or tape them into hard-covered notebooks. I still have some of those collections going back decades.

Evernote is the 21st century version of that in fully-digital format. The software puts an elephant icon in your browser. If you land on a page of an investment site that really looks interesting as a “keeper”, instead of bookmarking the page, you click on the Evernote elephant icon. A copy of the page is stored for future reference. Instead of just seeing the URL as you would in a bookmark list, you see the whole page within Evernote as a far more powerful visual reminder. Or, maybe you don’t want the whole page… just a chart on that page that you want to keep. No problem. There are options to do that too. This is one of the most useful (and free) utilities I’ve ever found.

Almost equally useful (and from the same company), Mac users will love Skitch too ( http://evernote.com/skitch ). I’m sure there are similar utilities for Windows users, but I’ll leave it to you to find them. Skitch simply lets you quickly and easily annotate an image. Add comments, place arrows to specific details, etc. This is great when you want to highlight one or more areas of a stock price chart. Perhaps an arrow pointing at a record high, with an annotation that says “Major product release” or “CEO stepped down”.

Skitch is a recent discovery for me, but I’ll be using it a lot more from now on.

Moving on… If you like stock charts a lot, yet don’t want to create your own in Excel, or risk copyright issues for copying them from a source with those © ’s all over the place, try Free Stock Charts ( http://www.freestockcharts.com ). This is actually a full-blow technical analysis platform that can be used for many purposes. For charts, though, you have a handy icon that will let you save the image with or without your own customization re: colour-scheme and other features. There are even Twitter and Facebook icons to let you share any chart with your friends and acquaintances. Want to export the data series that makes up the chart? You can do that too.

Finally, there are far too many excellent investing web sites to get into a list of links here, but sometimes you just need to learn a bit more about “geometric means” or “the awesome oscillator” or “MACD”. Wikipedia will likely have definitions, but if you want something specifically written for investors, look no further than these references…

Wikinvest ( http://www.wikinvest.com/site/Definitions ) Like Wikipedia, but focussed on investments. I’ve linked you to the definitions page, but there are also many other valuable reference materials if you look around. Like all Wikis, this is powered by volunteers, so expect it to grow at a modest pace.
Investopedia ( http://www.investopedia.com ) This one is loaded with extra tools and resource pages as well, but the core offering is its investment dictionary.

You’ll find both valuable, but you may not need to bookmark both. Pick your favourite.

So, there you have the first batch of tools, tips and tricks for DIY investors. There will no doubt be more to come, and we welcome your input.

Now let’s get out there and make some money!

STATE STREET INVESTOR CONFIDENCE INDEX (APRIL 2012)… The global SSICI dropped 3.9 points in April after rising 5 points in March.

The next SSICI monthly update will be released on May 29.

PREMIUM SERVICES… Join the ranks of our power traders by subscribing to one or more of our Premium Services.

Our premium subscription services provide investors with much larger databases of stocks than you’ll find at our web site; and the weekly updates are delivered conveniently via email attachments.

A US Equities Database is now publicly available with nearly 5000 stocks, complete with trend and consistency data.

If one Twitter feed is your preference, follow @ProfiTrend , which includes the tweets from all of the others, plus some more generic investing posts.

If Twitter isn’t your thing, the same regular intra-week updates are routed into “badges” at the ProfiTrend Advantage web site. (Badges are info boxes with the most recent tweets.)

COMING SOON… Here are a few topics I intend to cover in 2012 (but feel free to offer other suggestions)…

More chart chat… they’re eye-catching and look scientific, but often they’re a wolf in sheep’s clothing
What’s “normal”?… is a -4% decline in a single week a lot? is an annual 10% gain in your portfolio good, bad or just average? It’s good to have some benchmarks
Back-testing… you’re wasting your time!

MAILING LIST… If you’re not already receiving TrendWatch Weekly by email for free, be sure to get yourself on our email distribution list using the Subscribe button at the top.

Pros & Cons of Inverse and Leveraged ETPs

admin — Wed, 25 Apr 2012 05:55:19 +0000

REVISED SUBSCRIBER FORM: If you haven’t already done so, we’d appreciate it if you completed our revised subscriber sign-up form. Just click the Subscribe button at the top. The form has a few (optional) questions to help us get to know you better; but, more importantly, the new procedure makes us compliant with the so-called double opt-in standard. That’s a fancy way of saying that you have put yourself on the subscriber list, not someone else who may have used your email address. Thanks in advance!

The growth in the number and variety of exchange-traded funds (ETFs) is nothing short of phenomenal. The mutual fund industry is still bigger in terms of overall dollars invested, but that’s mainly because so many generations of passive investors have grown up at a time when that was the only way to buy a basket of equities all at once. They were (and still are) being gouged with all kinds of fees, while watching the value of those funds under-perform the overall market.
However, since most people realize now that 85% or more of all mutual funds under-perform the overall market averages, that can’t last. It’s a no-brainer that paying more to earn less is hardly the mark of a successful investor.

This week I have a look at some of the riskier and maybe not so well known ETFs. If you’re a regular reader, you’ll know that I’ve touched on inverse and leveraged ETFs before, but this week you’ll get some more detail.
But first, let’s have a look at the overall markets’ performance last week…

WEEKLY REVIEW… The results were mixed across the major indexes in terms of one-week changes. We had gains in the DJI, S&P 500 and S&P/TSX Composite Index, while the Nasdaq and S&P SmallCap indexes lost ground. The S&P/TSX Venture Index was the biggest loser with a 4.2% hit over the week. In short this is quite typical of the “flight to quality” phenomenon where investors want to reduce risk without exiting equities altogether.

The news wasn’t all bad, though. More stocks rose than fell last week (52% up in the S&P/TSX Composite Index and 67% up in the S&P 500). What’s more, volatility (as measured by the VIX or VIXC) actually fell quite a bit over the week (-3.2% for VIXC and -10.8% for VIX). Apparently, it was not a fear-inspiring week by any stretch of the imagination.

The ranking of the indexes by trend values continues to favour the US side… something we’ve seen for many weeks now.

On the US side, the proportion of stocks with positive trends rose to 55% with five of the ten industry groups trending higher. Within the S&P/TSX Composite Index 44% of stocks have positive trend values with six of the ten sectors trending higher.
Within both markets the top ranking sectors continue to be… HEALTH CARE, CONSUMER STAPLES and CONSUMER DISCRETIONARY.

For more details on sectors and performance of stocks within sectors, visit the DATA & CHARTS workbook.

In our annualized growth rate (AGR) chart below we take the average weekly %-gain/loss in the trend values of all stocks and multiply it by 50 to get a ball-park annualized speed of price movement of the S&P/TSX Composite and S&P 500 stocks. It’s like a speedometer, but instead of miles or kilometres/hour in your car, you will be seeing %-gain (or loss)/year.

Why annualize? Well, it’s not essential, but it provides a fairly meaningful scale and we can use larger round numbers. The differences also stand out more. Your car’s speedometer could read miles (or kilometres) per minute, but the numbers would be pretty small and harder to interpret, like our gains per week numbers. Scaling up the time dimension just acts like a magnifying glass, as it does with your car’s speedometer.

You can see that last week’s performance in equities improved for both the S&P 500 trend benchmark and the S&P/TSX Composite Index, although only the S&P 500 crossed over onto the positive side again.
As you know, the ProfiTrend Portfolio (PTP) is based on my own holdings. It’s a way of sharing with you how well I’m doing relative to the averages, without giving away too many specifics and personal details. You can see from the chart that the AGR for my ProfiTrend Portfolio (PTP) is now at 78%, down from the previous week, but as usual well ahead of the benchmarks.

Over the past week I sold five more holdings. Their trend values had simply dropped too close to zero, or they had retreated too far from the highest high achieved after my purchase date. These are my standard two criteria for selling.
Here are a few more details about the current status of the ProfiTrend Portfolio…

13 different holdings including a mix of an ETF (to short natural gas), a couple mid-cap consumer stocks, and an assortment of US equities, including a volatility play based on VIX derivatives.
Now 54% in cash, and won’t be buying anything on the long-side until the overall equities markets improve more. Shorting stocks, inverse ETFs and put options may soon become part of the strategy.
Average of current trend values of all holdings, if annualized as in the chart above (i.e. 50 X Trend Value), is 116%.
69% of the PTP holdings are now in US equities.
Average gain among current holdings: 12% over an average holding time of 8 weeks.

As I like to emphasize, if you’re not outperforming the average(s) all of the time, that could mean that you’ve gotten a bit lazy about dumping your losers and/or replacing them with equities that have more attractive trend and consistency values. Dropping losers before too much damage has been done is like dropping ballast from a hot air balloon. Without the extra weight, your portfolio will soar higher, as you can see from the PTP results above.

This week I’ll be elaborating on this topic in the next section. I’ll try to convince you that this style of portfolio tracking will not only keep you ahead of the market averages with your investments, but it’ll also reduce the pain of losses and prevent you from taking profits too soon.

INVERSE & LEVERAGED ETPs… As we all know index-based mutual funds arose because over 85% of all actively-managed mutual funds underperformed the market averages. The only logical alternative was to create a fund that tracks the index as precisely as possible. You won’t outperform the overall market, but at least you’ll have better results than 85% of mutual fund holders.
Then someone figured out that if such a fund just passively followed an index, why should investors have to pay the same fees when there is no fund manager buying and selling stocks regularly? Voila! Exchange traded funds (ETFs) were born!

That’s a bit of an over-simplification, but it’s close enough.

Creating an index-tracking ETF was simply a matter of buying shares of the companies that made up the index in the same proportions as their weights in the index. That’s perhaps a big job initially, but then there’s nothing to do until the index-managing body adjusts the weights or adds or deletes stocks from the index. The major indexes were the first and most obvious place to start; and then, as the ETF concept caught on, it made sense to create new ETFs for the lesser known or more specialized indexes.

Then the creation of ETFs took a bit of a turn, when it became obvious that similar vehicles could be created for financial assets other than stocks. Why not bonds? Why not foreign currencies? Why not gold or silver bullion?

Why not indeed? And so the ETF space divided and multiplied… with mutations of all sorts. Consequently, exchange traded products (ETPs), has become the new blanket term to cover all of these variations. The common element, of course, is that all ETPs all need to be backed by financial assets of some sort.

It was only a matter of time, though, before some of the ETP design-wizards realized that derivatives based on the underlying assets were financial assets too. If futures and options could be bought and sold just like the underlying assets that they represented, then why not create ETPs based on those? After all, wouldn’t it be easier to buy and roll-over S&P futures contracts as the underlying asset than to buy specific numbers of shares of all 500 companies in the S&P 500?

This is where it starts to get messy. It gets murkier still when you flip these ETPs on their heads, and let their values rise as the value of the underlying assets fall (inverse ETPs). Or why not offer leverage on the product? …ETPs that rise twice or three times as fast as the underlying asset.

So, put these all together and you get ETPs based on futures contracts based on indexes or hard commodities, then inverted and leveraged.

Obviously, the mathematical wizardry that goes into creating such products shouldn’t be of concern to the purchaser of such ETPs, except with regard to whether the creators of these products are actually achieving their goals. In many cases they are not, and it may take a bit of research on the investor’s part to find out just how far off they are.

It should be obvious that there will be “slippage’ (i.e., error) in every part of this exercise. In many cases the ETP’s value has to be adjusted every day after the close to correct for the errors that have accumulated during that trading day relative to the price moves in the actual underlying asset. That may seem like a good thing unless you notice that your ETP was up for the day at the close, then opens lower the next morning.

It might seem that such up and down “adjustments” should cancel each other over the long run, but not true. In fact these adjustments seem to have a cost of their own which accumulates over time.

Be sure to read the spec sheets for these exotic ETPs. In most cases you’ll at least see a warning that these vehicles should not be used for long-term investment purposes. I’ve even seen one disclaimer where the wording was very close to… “investors holding this ETP for the long term will lose all of their money“. This, in spite of the fact that the underlying asset may be on a nice consistent upward trend for the entire holding period!

So, should leveraged (inverse or not) ETPs based on futures be avoided at all costs?

I don’t think so, but I’d never recommend them to risk-averse investors who aren’t willing to do the necessary homework to know the limitations of what they are buying.

On the other, knowledgeable traders can definitely take advantage of these instruments…

If you think that the underlying asset is more likely to fall than rise, inverse ETPs are more convenient and probably less risky than selling short the ETFs that track the asset in the normal fashion. Shorting ETFs, like shorting stocks can sometimes lead to a situation where it is difficult to buy back the stock or asset when the direction turns and you want out quickly. This shouldn’t be a problem with inverse ETFs (or at least it’s not your problem).
If you’re totally convinced that an underlying asset will rise or fall substantially over the short-term, why not use a leveraged ETF if available? The leverage provided by the ETP is easier to obtain than buying and managing exchange listed options contracts. Options provide far more control over the amount of leverage you want, but they’re riskier as well, if you don’t fully understand options valuations and the various components that go into those valuations. Leveraged ETPs may well be based on derivatives like futures and options; but again, that’s someone else’s problem, not yours.
Whether you use leverage and the inverse component or not, ETPs may simply be the easiest way to invest in certain underlying assets like commodities, currencies and volatility.

Let me tell you about a few ways that I’ve used these products with varying degrees of success…

Trading volatility… Volatility (as measured by VIX) tends to spike up when geopolitical events scare people into selling equities and/or buying put options as insurance. That way if stocks fall, the profits from the puts will offset some of the losses on stocks. When tensions ease VIX falls back into the 15-20 range where it is right now. Since the major upheavals that scare investors could happen at any time (or not at all), I don’t see a lot of merit in buying VIX-based ETPs, then sitting around and waiting for the next earthquake in Japan, for example. Instead I’ll wait for the earth-shaking event to happen and let VIX spike upward. Then I’ll buy inverse VIX-based ETPs and wait for VIX to drop back to it’s “normal” levels. Then I sell. The main problem with this approach is that the tracking of these ETPs relative to VIX itself is among the poorest I’ve seen. And, as per the warning about not holding such products too long, I’ve been in situations where the “return to normal” for VIX took much longer than I anticipated.
Leveraging a sector trend… During the uptrend in US tech stocks in the first quarter, I did pick a few individual tech stocks that were performing nicely, but I also bought a 3X leveraged ETP based on a technology index. I’ve spoken often about the fact that selective stock picking should always be more profitable than buying an index-based ETF, but a leveraged ETF relative to an un-leveraged stock is another story.
An inverse leveraged commodity play… I don’t have any intention of becoming a futures trader anytime soon, so when it came to taking advantage of consistently-declining natural gas prices, the obvious choice was a leveraged inverse ETN. That has been one of my most profitable trades this year, and I’m still holding. If I’m losing something from the ETP’s futures trading costs, it’s been more than made up for with the consistent downtrend in natural gas prices and the leverage.

If all of this seems far too complicated, fear not. These exotic ETPs may not be for you. Instead, play it safe and stick with more traditional ETFs that don’t have the inherent problems that I’ve covered here today. If you choose ETFs based on niche indexes that are outperforming the broader indexes, you can still end up with more profits at the end of the year than simply buying an S&P 500 or S&P/TSX Composite Index ETF.

PREMIUM SERVICES… Join the ranks of our power traders by subscribing to one or more of our Premium Services.

Our premium subscription services provide investors with much larger databases of stocks than you’ll find at our web site; and the weekly updates are delivered conveniently via email attachments.

Trend and consistency values for all stocks and ETPs are provided for three time frames… 10-weeks, 20-weeks and 40 weeks using our relative trend analysis™ (RTA) approach. Check our Premium Services page for more details on the data fields included in each database.

A US Equities Database is now publicly available with nearly 5000 stocks, complete with trend and consistency data.

We also have a new “.UN” database of Canadian income trusts, REITs and Master Limited Partnerships (MLPs). Aside from the usual trend and consistency data for 10, 20 and 40 week time-frames, we’ve included annualized yield information, since these vehicles are currently delivering 8% per year on average on top of any capital gains that you’ll enjoy by picking those with consistent positive trend values. In addition there is a field for general type (REIT, MLP, other) and a more specific label for the nature of the business (financial services, real estate, industrial products, consumer goods, etc). We’re offering a one-year subscription of weekly updates for just $49.95. (Sorry, no pay-as-you go monthly option on this one, since the price is already so low.)

Although we’ve now consolidated our three web sites into one, you can still choose to follow just one or two of our separate Twitter feeds if you like. For tweets on the Canadian markets follow @TSXtrendwatch. For US equities follow @USequitytrends. For ETFs follow @ETFtrendtracker. For income trusts it’s @IncTrustTrader.

If one Twitter feed is your preference, follow @ProfiTrend, which includes the tweets from all of the others, plus some more generic investing posts.

If Twitter isn’t your thing, the same regular intra-week updates are routed into “badges” at the ProfiTrend Advantage web site. (Badges are info boxes with the most recent tweets.)

COMING SOON… Here are a few topics I intend to cover in 2012 (but feel free to offer other suggestions)…

More chart chat… they’re eye-catching and look scientific, but often they’re a wolf in sheep’s clothing.
What’s “normal”?… is a -4% decline in a single week a lot? is an annual 10% gain in your portfolio good, bad or just average? It’s good to have some benchmarks.
Back-testing… you’re wasting your time!

MAILING LIST… If you’re not already receiving TrendWatch Weekly notifications by email for free, be sure to get yourself on our distribution list using the Subscribe button at the top.

CONTACT… Contacting us is as simple as sending an email to info@ProfiTrend.com. Put as much info in the subject field as possible, before elaborating on the problem. Overly simple subject titles like “Problem Report” may not get noticed. Something like “Sector chart is missing in the US Equities Data&Charts page” will stand out.

Coping with Loss: Turning Pain into Pleasure

admin — Sun, 15 Apr 2012 17:18:39 +0000

NEW SUBSCRIBER FORM: If you haven’t already done so, we’d appreciate it, if you completed our new subscriber sign-up form. If you’re already at the web site, just click the Subscribe button at the top. If you’re reading this via email, go to http://pta.profitrend.com/page15. The form has a few (optional) questions to help us get to know you better; but, more importantly, the new procedure makes us compliant with the so-called double opt-in standard. That’s a fancy way of saying that you have put yourself on the subscriber list, not someone else who may have used your email address. Thanks in advance!

No one likes to be called a loser; and no one even wants to feel like a loser, because they made a bad decision (even if it seemed right at the time). That’s the nature of the human condition.

Because of that we also often grab small rewards, instead of patiently waiting for larger ones. It’s as if we want to grasp any reward at all, before it turns into a loss.

This week I’m going to delve into the psychological basis for those behaviours… especially because these all-too-human biases will make us poor investors, unless we do something about it.

But first, let’s have a look at last week’s damage.

WEEKLY REVIEW… After further losses in the beginning of the week, there was a substantial rebound midweek. Unfortunately, that was followed by a wicked Friday, the 13th. Although the Canadian index trend values are still considerably lower than the US ones, you can see that American stocks took a bigger beating on a one-week basis.

Actually 40% of the stocks in the S&P/TSX Composite Index rose last week, compared to 28% a week earlier. Nonetheless that leaves the total percentage of companies with positive trend values at 37%. Only four of the 10 sector indexes have positive trend values now.

On the US side, the proportion of rising stocks in the S&P 500 Index was just 16%, and the proportion of stocks with positive trends dropped to 43%. Only three of the 10 sector indexes have positive trend values.

Within both markets the top ranking sectors are… HEALTH CARE, CONSUMER STAPLES and CONSUMER DISCRETIONARY, although in a slightly different order for the S&P 500 vs the S&P/TSX Composite Index.

For more details on sectors and performance of stocks within sectors, visit the DATA & CHARTS workbook.

You can see that last week’s performance in equities declined for both the S&P 500 trend benchmark and the S&P/TSX Composite Index trend. The S&P 500 stocks on average are now trending lower and catching up with the negative AGR value of the S&P/TSX Composite Index benchmark.

As you know, the ProfiTrend Portfolio (PTP) is based on my own holdings. It’s a way of sharing with you how well I’m doing relative to the averages, without giving away too many specifics and personal details. You can see from the chart that the AGR for my ProfiTrend Portfolio (PTP) is now at 96%, actually up from the previous week, and clearly well ahead of the benchmarks.

Over the past week I sold three more holdings, and I have a couple more that will probably have to go this coming week. Their trend values have simply dropped too close to zero.

Here are a few more details about the current status of the ProfiTrend Portfolio…

19 different holdings including a mix of small-cap Venture listings, an ETF (to short natural gas), a couple mid-cap consumer stocks, and an assortment of US equities, including a volatility play based on VIX derivatives
Now 34% in cash, and won’t be buying anything on the long-side until the overall equities markets improve substantially. Shorting stocks, inverse ETFs and put options may soon become part of the strategy.
Average of current trend values of all holdings, if annualized as in the chart above (i.e. 50 X Trend Value), is 122%
58% of the PTP holdings are now in US equities
Average gain among current holdings: 14% over an average holding time of 7 weeks

ALLEVIATING THE PAIN OF LOSS… I’ll be dipping into the area of behavioural finance again this week. This area of research was relatively unknown in economic circles, even a decade or two ago, because the original research that led to this emerging field was done by psychologists, starting back in the 70’s. I give psychologists, Daniel Kahneman and Amos Tversky, credit for most of pioneering fundamental research, although many others have contributed, as this field has evolved. I believe Kahneman was the first psychologist to ever win a Nobel Prize for Economics (shared posthumously by Tversky).

The traditional view of economics up until this work was done held that investors rationally maximized their profits, and that the collective result of all of these rational individuals could be used as a basis for economic forecasts and explaining all sorts of financial results.

Then Kahneman and Tversky came along and threw a wrench into the works by proving that human beings aren’t rational at all, when it comes to money. We have inherent psychological biases that lead us to all sorts of illogical decisions.

These biases can be explained in terms of survival value in the early stages of mankind. So, even though humans have evolved enormously, many of these built-in psychological biases still persist. Imagine the cave man wandering through a forest and encountering a sabre-toothed tiger. Does he stand still and work out the odds of defeating this animal with his stone club, or does he run away and do the math later? I think we know the answer to that one.

Nowadays we call this loss aversion. For the caveman, the loss of one’s life was at stake, and the decision to run (logical or not) made sense. Nowadays, we find that loss aversion applies equally well in investment behaviour, where money, not one’s life, is at stake.

I take full responsibility for the rest of this rant, but want to give credit to James Montier’s Little Book of Behavioral Investing for the research examples I include here. It’s clearly not among the best books on behavioural finance; but it’s a very readable little volume, that I’d recommend to anyone wanting an introduction to the field. You can find an Amazon link to order the book in our Book Store.

Let’s start with an age old expression that we’ve all seen or heard before… “cut your losses short, and let your profits run”. Who knows who originally came up with that phrase; but it’s undeniably true, if you want to be a successful trader. The problem is that this advice runs contrary to our built-in behavioural biases. Our aversion to financial loss is a far stronger emotion than the feeling of satisfaction or joy that comes with making profitable investments. Hence, our natural bias is to hang on to losing stocks and take profits too soon on our winners (before they turn into losers).

A lot of the early research experiments that proved this were fairly simple. Suppose you sit down in a psychology lab and are given $20 to play a game lasting 20 rounds. You’re asked at the beginning of each round whether you want to “invest” in a toss of a coin. If it comes up heads you win $2.50. If it’s tails you lose $1. Clearly, the odds are in your favour, since the expected value in the long haul is $1.25 per round, giving you about $25 after 20 rounds. You’re given the option to invest or not invest every time, but logically it’s in your best interest to invest every time. Even if you experience a few losses in a row, each round is an independent coin toss, so you should always come out ahead by the end… even if the net result isn’t precisely $25.

The experiment was run with two groups of people… folks like you and me, and a group of people who had a form of brain damage where they experienced an inability to feel fear. Who came out ahead? The brain damaged group. They invested 84% of the time for higher profits than the normals who invested 58% of the time. What’s even more interesting is that when the data were analyzed from beginning to end — separating the results into four sequential groups of five opportunities each — the normal folks got worse over time. They bet less often as the experiment moved on. The brain damaged group invested just as often throughout.

You can run your own experiment along these lines if you like. Put this proposition up for consideration among some friends… “I’m going to toss a coin; and if you lose, you pay me $100”. Then ask this question… “How much would you need to win to make this bet attractive?”

The rationale response is any amount, even $1, more than $100 However, I doubt if that would be your reply or that of any of your friends. In one experiment involving 600 mutual fund managers, the average response was $200. That says a lot about both the fear of loss and the irrationality of professional fund managers!

If you find these examples too artificial, there are lots of other research studies that use actual trading records… some involving as many as 10,000 investors over 6 years. Investors were 1.7 times more likely to sell winning stocks than losing stocks. What’s more, tracking the winning stocks after they were sold, they tended to continue to move higher, whereas the losers that they refused to sell drifted even lower.

A similar study analyzed the transactions in 30,000 US mutual funds over 12 years. Once again, the ratio of selling winners to selling losers was higher. Even with the best performing funds, the ratio was 1.2:1. The worst performing funds had a ratio of 1.7:1… just like individual investors. Being a fund manager doesn’t give you much of an edge at all.

I’ve read dozens of research reports along these lines, and the evidence is indisputable. Loss aversion bias has one of the most detrimental effects on investing behaviour. So, what’s to be done about it?

Sadly, it’s one thing to identify a problem and quite another to solve it. Too much research has focussed on the problem, and too little on finding a solution. Recommendations tend to come back to the same adage… “cut your losses short, and let your profits run”. But, that’s not a solution at all, if we find it impossible to do that consistently because of our biases!

Another solution is to automate the investing process with an algorithm that leaves emotions out of the equation. Again, that’s a possibility in principle, but would you really let your computer do all of your trading for you. There are still many valid reasons for tipping investment decisions one way or the other that are outside of your biases. A simplistic algorithm wouldn’t be able to capitalise on that additional wisdom. The number of exceptions that you’d want to program into the algorithm would likely be far too complex, than you simply calling the shots yourself. You could still use your algorithm to attempt to reduce the stress associated with selling losers, but it’s still only a partial solution.

Although I never set out to solve the loss aversion problem myself, I think I’ve come remarkably close, when I came up with the AGR “speedometer chart” concept a little over than a year ago (Portfolio Tracking… Measuring the Speed of Profits).

At the time I was strictly interested in what my title said… measuring how fast my portfolio was accumulating wealth. Laying out my “speed” relative to the speed of the benchmarks was all I wanted… proof that I was ahead of the curve. Something to brag about!

Then, something quite interesting happened. I not only wanted to keep my “speed of profits” ahead of the benchmark indexes… I started wanting to maximize my lead. I wanted to do whatever it took to leave the benchmarks in the dust.

Initially, the obvious thing to do seemed to be to buy new stocks that had trend and consistency values well ahead of the prevailing pace of the indexes (within the limits of weeding out “freak cases”, as I’ve discussed on previous occasions). That makes sense, but the limitation is that my PTP speedometer is based on the history of my holdings, whereas the index speedometers are 100% based on current trends. That means that even a great stock pick will take some time to have a positive influence on my speed.

Then I discovered that if I spent more time examining the characteristics of the worst performers in my portfolio, I was finding reasons to sell some of them. And, as I did, I immediately saw that my speedometer took a jump upward… widening the gap with my competitors. I was still taking a loss, but the reward of seeing my lead expand more than made up for that. As in the recurring example, that I use under my AGR speedo chart above, it’s like dropping ballast from a hot air balloon. Away you go!

Suddenly selling losers felt really, really good, and still does to this day!

Here’s an example from last week. My PTP portfolio had a “speed” of 86% in the last TrendWatch Weekly. I had identified a couple stocks that should probably have been sold on Monday, but I got careless and let things slide… not only through Monday, but Tuesday as well. That was a bad move in light of continuing declines in the equities markets overall, and there’s no excuse for that.

By mid-week, my 86% bar had shrunk to about 65%. I was still well ahead of the benchmarks, but seeing my lead slipping away. Three quick sales of the stocks I should have sold on Monday fixed that. My speedo-bar immediately jumped from 65% to 101%, before ending the week at 96%. I regret losing more than I should have by not selling on Monday, but the satisfaction of the boost in my performance bar more than made up for that.

Amazingly, this “turn pain into pleasure” tactic works on winning stocks too. The average investor (and mutual fund manager) sells winners too soon… out of fear that they might turn around and become losers. If you start selling winners too soon with a portfolio linked to a speedometer chart, you’ll see your lead over the benchmarks diminish. After all, it’s the winners that gave you your lead in the first place!

In retrospect this seems so obvious to me now, but it certainly didn’t at first. Right now, I am rewarded by selling losers before my losses mount; and I’ll happily keep my winners, as long as they’ll keep my speedo-bar soaring high above the indexes.

Of course that doesn’t mean that I never take profits on winners. Eventually, the trend will fizzle out; and it’ll be time to cash out, before losses from recent highs start accumulating.

In short you still need some sell criteria, whether you’re cashing out on a winner or a loser. I’ve covered that topic many times before, but to recap what I use for an exit strategy…

Sell if the weekly trend and consistency levels fall by a certain amount.
Sell if the price has fallen a certain amount from my purchase price.
Sell if the price has fallen a certain amount from the most recent high after my purchase.

#1 takes me out if my reason for picking the stock initially (strong trend and consistency) is no longer valid. #2 takes me out when I’ve unfortunately bought at a top. It could end up being a temporary top, but I don’t wait around to find out. And, #3 takes me out of my most profitable acquisitions (usually hand-in-hand with #1).

I’m not going to elaborate on what “certain amount” means in each case; because it varies quite a bit, depending on overall market conditions and the purchase price of the stock, among other things. You should pick your own “certain amounts” based on your risk tolerance as well. For example, are you willing to lose 20% from your purchase price, if all other factors suggest that you might ultimately be heading for a 40%- 50% gain? Or would you feel better selling more often with a 10% maximum loss? There is no magic formula for this sort of thing. It’s the underlying principles that matter.

So, give this a try, if you’re not already tracking your portfolio’s performance in the manner I’m suggesting. You won’t regret it.

The majority of stock indexes are in at least modest downward trends right now, and it’s probably time to curtail your purchases. But what better time is there to implement a speedometer-like portfolio tracking system to help you withdraw into cash, as each stock in turn starts to weaken in its upward momentum. You’ll feel a whole lot better, since your losses will end up feeling like gains.

So, this week I won’t conclude with “Now let’s get out there and make some money!” Instead, I’ll say “Let’s ease out of our losing positions for the time being, and wait for better times ahead!”.

STATE STREET INVESTOR CONFIDENCE INDEX (MARCH 2012)… The SSICI has risen 5 points in March from February’s revised level of 86.6, after steady declines since late last year.

As usual some of the more interesting findings each monthly report are in the regional differences. The North America index rose 8.7 in March to 89.5. The European index improved 5.4 points to 100.6. The Asian index was little changed at 94.5… down 2.2 points since February.

Perhaps the most significant observation is that these institutional investors have more risk tolerance for European equities right now than those in the other regions. The turning point there was in February, but you can see that European stocks were favoured over North American equities as early as last summer.

The next SSICI monthly update will be released on April 24.

PREMIUM SERVICES… Join the ranks of our power traders by subscribing to one or more of our Premium Services.

Our premium subscription services provide investors with much larger databases of stocks than you’ll find at our web site; and the weekly updates are delivered conveniently via email attachments.

A US Equities Database is now publicly available with nearly 5000 stocks, complete with trend and consistency data.

If one Twitter feed is your preference, follow @ProfiTrend , which includes the tweets from all of the others, plus some more generic investing posts.

If Twitter isn’t your thing, the same regular intra-week updates are routed into “badges” at the ProfiTrend Advantage web site. (Badges are info boxes with the most recent tweets.)

COMING SOON… Here are a few topics I intend to cover in 2012 (but feel free to offer other suggestions)…

More chart chat… they’re eye-catching and look scientific, but often they’re a wolf in sheep’s clothing
What’s “normal”?… is a -4% decline in a single week a lot? is an annual 10% gain in your portfolio good, bad or just average? It’s good to have some benchmarks
Back-testing… you’re wasting your time!

MAILING LIST… If you’re not already receiving TrendWatch Weekly by email for free, be sure to get yourself on our email distribution list using the Subscribe button at the top.

Easter Weekend Q & A

admin — Mon, 09 Apr 2012 14:53:34 +0000

NEW SUBSCRIBER FORM: If you haven’t already done so, we’d appreciate it if you completed our new subscriber sign-up form. If you’re already at the web site, just click the Subscribe button at the top. If you’re reading this via email, go to http://pta.profitrend.com/page15. The form has a few (optional) questions to help us get to know you better; but, more importantly, the new procedure makes us compliant with the so-called double opt-in standard. That’s a fancy way of saying that you have put yourself on the subscriber list, not someone else who may have used your email address. Thanks in advance!

Although I do have a reminder buried down at the bottom of these weekly editions of the newsletter, I encourage you to send in questions and comments whenever you like via email. I generally find time to answer most of them in a timely fashion, and your feedback helps us plan future directions.

With some requests I sense that the question posed (and my reply) might also be of interest to other readers, so I set those aside. This week I’ll share some of them with you… to digest along with your Easter weekend meals.

But first, let’s have a look at last week’s damage.

WEEKLY REVIEW… As you can see in the chart below, it was a vicious four-day trading week, with Canadian stocks (especially Venture listings) taking a major hit. On average Canadian stocks are now decidedly trending lower, while US equities have managed to stay on the plus-side so far.

Only 28% of the stocks in the S&P/TSX Composite Index rose last week, leaving the total percentage of companies with positive trend values at 44%. Only five of the 10 sector indexes have positive trend values now.

On the US side, the proportion of rising stocks in the S&P 500 Index was also limited to 28%, but the proportion of stocks with positive trends remains respectable at 65%. Seven of 10 sector indexes have positive trend values.

Looking at the top five performers of the 10 sectors in both the S&P 500 and the S&P/TSX Composite Index, we find overlap with four sectors… FINANCIAL SERVICES, HEALTH CARE, CONSUMER STAPLES, and CONSUMER DISCRETIONARY. INFORMATION TECHNOLOGY remains in the top 5 for the S&P 500, while it has been replaced with TELECOMMUNICATION SERVICES in the TSX rankings.

For more details on sectors and performance of stocks within sectors, visit the DATA & CHARTS workbook.

As you know, the ProfiTrend Portfolio (PTP) is based on my own holdings. It’s a way of sharing with you how well I’m doing relative to the averages, without giving away too many specifics and personal details. You can see from the chart that the AGR for my ProfiTrend Portfolio (PTP) is now at 91%, down from the previous week, but still well ahead of the benchmarks.

Over the past week I sold three more holdings, and I have a couple more that will probably have to go this coming week. Their trend values have simply dropped too close to zero.

Here are a few more details about the current status of the ProfiTrend Portfolio…

22 different holdings including a mix of small-cap Venture listings, an ETF (to short natural gas), a couple mid-cap consumer stocks, and an assortment of US equities, including a volatility play based on VIX derivatives
Now 26% in cash, and still willing to spend it on US equities
Average of current trend values of all holdings, if annualized as in the chart above (i.e. 50 X Trend Value), is 147%
60% of the PTP holdings are now in US equities, and this percentage will likely grow in light of the continuing superior performance of US equities and the strong Canadian dollar
Average gain among current holdings: 12% over an average holding time of 7 weeks

QUESTIONS & ANSWERS… What follows are some questions that I’ve received via email during the first quarter of this year, and my replies. None of these are simply cut-and-paste. I’ve removed personal references and other not-so-relevant specifics. In other words, they’re an edited paraphrase of the original exchanges.

Q: You seem to be a bit wishy-washy when it comes to ETFs. You provide lots of useful data (free and by subscription), yet you sometimes say that stock-picking is the preferred alternative. Can you elaborate?

A: Of course! Imagine that you’ve trained really well for a marathon, and you’re hoping to finish somewhere near the front of the pack… let’s say among the top 10% of the runners.

As the event approaches, however, a sports-clothing rep approaches you and asks if you’re willing to try a new high-tech “running outfit”. It covers your whole body, and contains bio-sensors to track and display your cardio-vascular status at all times. It also has a built-in cooling system and continuously pumps nutrient-containing fluids into your body as required. What’s more, the whole “container” reduces your wind resistance. The drawback… it weighs over 10 pounds!

You can probably see where I’m going with this. You’d likely have a comfortable healthy run, but carrying an extra 10 pounds or so for 26 miles isn’t going to let you reach your goal of being in the top 10%. You’ll probably finish somewhere in the middle.

That’s pretty much the case with equity ETFs. The most popular ones are based on a broad index, which tracks the average of a pool of stocks. The packaging is attractive and functional, since you don’t need to worry about a lot of specifics associated with individual stocks (your portfolio’s bodily functions). But that’s where the advantage ends. If average is good enough for you, go for it; but a stock index-based ETF, by definition, can’t perform better than average. Pick a handful of trend-leading stocks on your own, and you have a good chance of leaving the average back in the dust.

Q: A lot of ETFs nowadays aren’t based on broad-based stock indexes. What do you think about those?

A: Now that’s a different story! The more “niche” you go with ETFs, the more that you can treat them like individual stocks, and pick those that are beating the broad-based indexes (and the ETFs associated with those). Niche ETFs also allow you to invest in areas that you might find too intimidating to include in your portfolio otherwise… e,g., currencies, commodities, foreign stocks, volatility plays. There’s no shortage of imagination when it comes to new exchange-traded products (ETPs… the broader term that includes stock index-based ETFs as a subset).

I’m currently holding an ETF that rises with the declining price of natural gas, and offers some leverage to boot. You can’t get much more niche than that! Also, while watching the US high-techs outperforming from the beginning of this past quarter, I did pick some specific stocks in that sector, but also purchased a high-tech ETF to cover “the rest” of that group. Normally, that would mean that my ETF would likely under-perform my own tech stock picks, but this ETF has 3X leverage. It’s actually outperforming my individual stocks in that sector at the moment.

So you can see now that leverage can compensate for the fact that a sub-index ETF based on both great and not-so-great components. Of course, leverage can also work against you, as sector performance rotates. That’s why it’s important to make your exit quickly and gracefully before much damage is done to your profits.

Q: What’s the latest on income trusts? Some have great yields, so are they really worse investments than blue-chip stocks that pay dividends?

A: Yes and no. We still take income trusts seriously, since we’ve added a premium subscription database of equities with the familiar “.UN” suffix that you see on the ticker symbols of income trusts. Limited partnerships also sport the .UN suffix, but there are only a handful of those, so I won’t get into that.

As in the glory days of income trusts (when we had a dedicated web site on that investment class), some of them do offer what look like amazing monthly distributions… adding up to 10%/year or more. Furthermore, there are still about 150 of them out there, in spite of the Halloween Massacre Legislation of 2006, which supposedly put most of them out of business by January 2011.

Our stance has never changed since the hey-day of trusts. We look for capital gains potential first… then accept the monthly payments as gravy to cover trading costs or buy ourselves something nice. You can have your cake and eat it too with many of these trusts.

What most people don’t realize, however, is that they’re just as volatile as growth stocks that don’t have an income component. Furthermore, if the monthly distributions are reduced or eliminated, there is always such a mass sell-off, that you will lose a lot of money before you can make it to the exit door yourself. Income trusts are for traders, not for buy/hold income-oriented investors.

If you genuinely want an income stream for a part of your portfolio while (hopefully) preserving most of your capital, stay away from trusts. The dividends from blue-chip stocks may have a lower percentage yield than trusts; but don’t forget that dividends have taxation benefits that make the net yield much higher.

Q: The proportion of stocks within the S&P/TSX Composite Index with positive trend values has now dropped below 50%. Does that mean I should sell all of my Canadian stocks immediately?

A: No. Take your time. In general we absolutely want the odds in our favour when we’re buying stocks and trying to maximize our profits. But, on the other hand, not every stock advances at the same rate; and on the downside, not every stock’s trend falls into negative territory at the same time.

Just as we’ll inevitably be selling some stocks even as the overall markets rise (simply because there are better opportunities elsewhere), we’ll do the same thing on the way down. What you’ll find though is that as the general market falls, you’ll be selling more frequently and finding fewer stocks with attractive trend and consistency numbers.

So, don’t panic. Ease out as individual stocks in your portfolio lose their appeal, and don’t replace them until the odds shift back to the plus side. Treat the 40-60% area as kind of a gray area. When 60% or more stocks have positive trend values, shop away… reassured that the odds are in your favour. On the other hand, don’t abandon hope at precisely 50%; and definitely don’t start shorting stocks until you see the %-up number drop below 40% and stay there for a couple weeks. Treat each item in your portfolio on its own merits.

Q: With all due respect for the unique characteristics of your relative trend analysis™ (RTA) approach, do you also use other technical analysis tools? If so, why don’t you mention them? And, what about fundamental analysis?

A: This topic probably deserves at least one dedicated edition of TrendWatch Weekly, if not several. For now, let me offer a fairly general reply.

First of all, lets recap the basics on fundamental vs technical analysis. The fundamentals are the things that make a company great or not so great… the quality of the management team, the history of revenues and profits from those revenues, how much debt is owed and what’s being done to pay it down, the health of the sector the company is competing in, etc. In theory, the better the company stands on as many of these dimensions as possible, the better the potential gains in stock price.

But there’s something called the efficient market hypothesis (based on quite a bit of academic financial research) that says that all of the fundamentals about a company are instantaneously factored into the stock price as soon as they are made public. The general idea is that information flows so fast nowadays that buyers and sellers collectively absorb it all within seconds and implicitly decide what the share price is worth.

The technical analyst therefore says that it’s irrelevant to waste time on fundamental analysis, since it’s always too late for it to have any value. The technical alternative is to look for recurring patterns among stock price histories. If certain patterns or measurements based on those patterns seem to precede advances or declines in stock prices, then it’s worthwhile to base investment decisions on those alone.

If you work your way through any book on technical analysis (see recommendations in our Book Store), you see a whole lot of math that seems to make technical analysis seem really scientific. Believe me, it’s not! There are decades worth of academic research on the factors influencing stock prices and the forces that guide buying and selling equities, but I defy anyone to show me a single properly run scientific study that supports the use of any of the hundreds of technical analysis indicators out there. Sorry. There aren’t any.

So, does that mean that both fundamental and technical analysis are worthless?

No, I don’t think so, but you need to put both of them in the proper context.

The fundamentals may already be factored into today’s stock price, but the track record of a company’s improving fundamentals may have something to say about tomorrow’s stock prices… at least relative to competing companies with less attractive characteristics.

Technical analysis, on the other hand, also provides a common methodology for comparing companies and their stock prices. Even if technical indicators can’t be proven to predict future stock prices consistently, they at least force the practitioner to apply a systematic methodology to focus his or her attention when comparing stocks.

The technical analysis indicator(s) you choose to use are entirely up to you, but don’t bother adopting a whole bunch of them. Pick one or two that seem to make sense to you. I know that I can prove mathematically that almost all technical indicators based on price histories alone are just different representations of exactly the same thing.

It’s like measuring something with a yardstick or a metre stick. If one person likes metric and another doesn’t, that’s ok. We already know that 1 metre = 1.0936133 yards, so the choice of length-measuring tools is irrelevant. The numbers are different but the result is identical.

It’s the same with technical indicators, although the math is a little more complex. If you like MACD, use MACD. If you prefer a momentum oscillator of some sort, use that. Anyone with a few math skills can demonstrate that one is a transformation of the other, just like metric can be tranformed into the antiquated US measurement system.

It’s not quite that clean though in the sense that the developer of each of these tools has also provided some rules for buy and sell points on their prferred numerical scale. Hence, while a transformation of the numeric values from one to the other can be demonstrated, a transformation of the buy/sell rules for using one set of numbers vs the other is not so obvious.

The interpretational rules are subjective in the first place, however, and will remain so until someone proves that one algorithm really does outperforms another. I don’t see that happening in my lifetime.

So, where does that leave relative trend analysis™ (RTA) ? In many respects it sure looks like technical analysis, but I don’t think of it in those terms. I don’t look for recurrent patterns. I don’t ever try to pick market (or stock) tops or bottoms. And, although I offer guidelines, I don’t really have firm rules on when to buy and sell.

For me it’s a matter of appraising the state-of-everything on a weekly basis and observing which opportunities are trending up faster than the rest. That’s the relative aspect of RTA, and that is the core of the whole exercise.

Then comes the due diligence. Once I find some winners relative to thousands of other choices, I go looking for reasons not to buy. With companies with extremely high trend and consistency values, I’m more likely to find those reasons.

If something’s not right, I find out what it is quickly, and scratch that stock off my list. When I can’t find reasons for rejection, I buy. That’s it. Next weekend is in the unpredictable future, so I’ll re-appraise everything then. There is no academic research (yet) to back-up the RTA approach either, but I do know that it’s kept me well ahead of the market averages for many years now. Hopefully, many of you can attest to this as well. If so, be sure to spread the word, or send me a testimonial, or both.