Presentation Slides - Market Technicians Association

Rules-based Trend Following
And a whole lot more…
SMM-072012 - 504
My Favorite Books
Analysis? Or Playing with Software?
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N D-COMP (2,257.64, 2,257.64, 2,257.64, 2,257.64, -15.73), MESA Sine W av e (-0.06962), MESA Lead Sine (-0.75462)(MESA Sine Wav e), Parabolic SAR (2,234.44), Klinger Oscillator (0.00)
0.0%
23.6%
38.2%
50.0%
61.8%
100.0%
Polarized Fractal Ef f iciency (20.8825), TRIX (0.25195), D irect nl Mov em ent AD XR (27.0000), Forecast Oscillat or (-0.98271)
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0
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D ecember
2004
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N ov ember
D ecember
2005
February
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April
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N ov ember
D ecember
Dow Industrials Drawdown
The Dow Jones Industrial Average is a “price weighted index” which represents the average value of 30 large, industrial stocks. It is not possible to
invest directly in indexes (like the Dow Jones Industrial Average) which are unmanaged and do not incur fees and charges. Past performance is no
guarantee of future results. Investments are subject to risk, and any of Stadion’s investment strategies may lose money.
Bear Markets Can be Expected
Bear Markets in Dow Jones Industrials from 2/17/1885 to 12/31/2013
Largest to Decline Return Required
Recovery
Peak Date Trough Date
Smallest from Peak
for Recovery
Date
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
-89.19%
-53.78%
-48.54%
-46.64%
-46.58%
-46.14%
-45.08%
-40.13%
-37.85%
-36.58%
-36.13%
-31.76%
-27.10%
-21.16%
-20.13%
824.72%
116.35%
94.34%
87.42%
87.20%
85.67%
82.08%
67.02%
60.89%
57.67%
56.57%
46.54%
37.17%
26.83%
25.20%
Average
Avg Ex 29
Minimum
Maximum
Std. Dev.
Median
-41.79%
-38.40%
-20.13%
-89.19%
16.48%
-40.13%
71.78%
62.34%
25.20%
824.72%
-14.15%
67.02%
9/3/1929
10/9/2007
1/19/1906
6/4/1890
11/3/1919
6/17/1901
1/11/1973
11/21/1916
1/14/2000
2/9/1966
8/25/1987
9/5/1899
12/13/1961
7/17/1990
12/3/1886
7/8/1932 11/23/1954
3/9/2009
3/5/2013
11/15/1907 7/28/1915
8/8/1896
1/20/1899
8/24/1921 12/31/1924
11/9/1903 3/24/1905
12/6/1974 11/3/1982
12/19/1917 7/9/1919
10/9/2002 10/3/2006
5/26/1970 11/10/1972
10/19/1987 8/24/1989
9/24/1900
6/3/1901
6/26/1962
9/5/1963
10/11/1990 4/17/1991
4/2/1888
4/25/1890
Decline Decline in Recovery Recovery Bear Duration Bear Duration Average
in Days Months
in Days in Months
in Days
in Months Drawdown
845
355
552
1872
540
713
481
320
685
1052
38
314
134
61
398
557.33
536.79
38.00
1872.00
461.33
481.00
40.24
16.90
26.29
89.14
25.71
33.95
22.90
15.24
32.62
50.10
1.81
14.95
6.38
2.90
18.95
6464
997
2192
735
1006
410
1998
459
1003
625
468
202
301
129
623
307.81
47.48
104.38
35.00
47.90
19.52
95.14
21.86
47.76
29.76
22.29
9.62
14.33
6.14
29.67
7309
1352
2744
2607
1546
1123
2479
779
1688
1677
506
516
435
190
1021
348.05
64.38
130.67
124.14
73.62
53.48
118.05
37.10
80.38
79.86
24.10
24.57
20.71
9.05
48.62
-55.98%
-20.10%
-18.48%
-22.33%
-24.10%
-22.45%
-17.30%
-21.39%
-13.64%
-12.68%
-19.34%
-15.97%
-9.51%
-10.77%
-8.08%
32.26 1174.13
25.56 796.29
1.81 129.00
89.14 6464.00
21.97 1580.65
22.90 625.00
70.81
37.92
6.14
307.81
75.27
29.76
1731.47
1333.07
190.00
7309.00
1741.53
1352.00
103.07
63.48
9.05
348.05
82.93
64.38
-22.53%
-16.87%
-55.98%
-8.08%
11.27%
-18.48%
A 41.79% declines requires a 71.78% gain to break even!
Dow Jones Industrial Average
Feb. 17, 1885 – Dec. 31, 2013
DRAWDOWN DURATION
Drawdown
Range
-100% -20%
-15% -19.99%
-10% -14.99%
-5%
-9.99%
-0.01% -4.99%
All DDs
Average
Total
Total
Average
Percentage
Duration Duration Duration
Duration of
of time
of
of
of
Drawdown
spent in
Drawdown Drawdown Drawdown
(Days)
Drawdown
(Months)
(Days) (Months)
1,730
291
116
55
6
58
82.40
13.85
5.52
2.60
0.28
2.76
25,957
1,454
1,508
2,130
3,060
34,109
1,236.05
69.24
71.81
101.43
145.71
1,624.24
100% - 96.27% = 3.73%
73.26%
4.10%
4.26%
6.01%
8.64%
96.27%
Dow Industrials 1885 (16,044.15, 16,161.64, 16,006.59, 16,133.23, +92.6709), Highest High (16,588.25)
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Highest High Time Summation (1,325.00), Time Summation (35,466.00)
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1890
Time Spent Making New Highs (3.73597)
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Common Buy and Hold Knowledge
6’ Texan
Is an 85 year average really meaningful?
Ibbotson® SBBI®
Stocks, Bonds, Bills, and Inflation 1926–2011
Past performance is no guarantee of future results. Hypothetical value of $1 invested at the beginning of 1926. Assumes reinvestment of income and no transaction
costs or taxes. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. Small stocks in this
example are represented by the fifth capitalization quintile of stocks on the NYSE for 1926–1981 and the performance of the Dimensional Fund Advisors, Inc. (DFA)
U.S. Micro Cap Portfolio thereafter. Large stocks are represented by the Standard & Poor’s 500 ®, which is an unmanaged group of securities and considered to be
representative of the stock market in general. Government bonds are represented by the 20-year U.S. government bond, Treasury bills by the 30-day U.S. Treasury bill,
and inflation by the Consumer Price Index. © 2012 Morningstar. All Rights Reserved. 3/1/2012. For the full disclosures, please see the Appendix.
Average Is Rarely Average
The S&P Index is the Standard & Poor’s Composite Index of 500 stocks and is a widely recognized, unmanaged index of
common stock prices. It is not possible to invest directly in indexes (like the S&P 500) which are unmanaged and do not incur
fees and charges. Past performance does not guarantee future returns.
Statistics! Can you Trade them?
The Dow Jones Industrial Average is a “price weighted index” which represents the average value of 30 large, industrial stocks. It is not possible to invest directly in
indexes (like the Dow Jones Industrial Average) which are unmanaged and do not incur fees and charges. Information compiled from data made available by
http://www.djindexes.com/. Past performance is no guarantee of future results. Investments are subject to risk, and any of Stadion’s investment strategies may lose
money. Source: Stadion
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Different Types of Market Analysis
Most popular is Fundamental Analysis
• Focus is on ‘multiples’ or fundamental ratios
• > 90% of these ratios use Price (numerator / denominator)
• Price Earnings Ratio, Price to Sales, Price to
Dividends, Price to Book Ratio, etc.
Technical Analysis uses Price
• Price (this is what we buy)
• Trend Determination (it is the trend of the price that we
are analyzing)
• Breadth Analysis (derivative of price movement)
• Relative Strength Analysis
• Most importantly, it bridges the gap between analysis and
action
Past performance does not guarantee future returns. Investments are subject to risk, and any of Stadion’s investment strategies
may lose money. The investment strategy presented is not appropriate for every investor and individual clients should review
with their financial advisors the terms and conditions and risk involved with specific products or services. Stadion’s actively
managed portfolios may underperform during bull markets.
Why do Markets Trend?
Supply and Demand
• A buyer (demand) bids for a certain amount of stock at a
certain price
• A seller (supply) offers a certain amount at a certain price
• The reasons for each are complex and impossible to
quantify
• When they eventually agree, it is on a Price
• And that alone determines profit or loss
• Not earnings, not sales, not fed policy, not
management, etc.
• Changes in supply and demand are reflected immediately
in price – an instantaneous assessment of supply and
demand
Past performance does not guarantee future returns. Investments are subject to risk, and any of Stadion’s investment strategies
may lose money. The investment strategy presented is not appropriate for every investor and individual clients should review
with their financial advisors the terms and conditions and risk involved with specific products or services. Stadion’s actively
managed portfolios may underperform during bull markets.
What Do You Know About this Chart?
Dow Jones Euro Stoxx (231.580, 234.010, 222.100, 226.060, -4.28000)
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
We use Technical Analysis because…
It is something we can believe in and rely upon.
It removes the destructive emotions of fear, hope, and
greed.
“Individuals who cannot master their emotions are ill-suited to profit from the
investment process.” Benjamin Graham
It keeps our perceptions clear.
“It ain’t what you know that gets you into trouble, it’s what you know for sure
that just ain’t so.” Mark Twain
It gives us discipline.
Past performance is no guarantee of future results. Investments are subject to risk, and any of Stadion’s investment
strategies may lose money.
Think About It
“All the financial theories and all the
fundamental analysis in the world will
never be any better than what the
trend of the market will allow.”
Greg Morris
Past performance is no guarantee of future results. Investments are subject to risk, and any of Stadion’s investment
strategies may lose money.
So! How’s it working for you?
Why I use Breadth
January – December 2007
Even though the
S&P 500 rose
during this time
period, the
Stadion
Advance/Decline
Indicator showed
a net decline.
S&P 500
Neutral
Stadion
Advance/Decline
Indicator
S&P 500 Index is the Standard & Poor’s Composite Index of 500 stocks and is a widely recognized, unmanaged index of
common stock prices. The indexes are not available for direct investment and there are no trading expenses associated with
the index. Past performance is no guarantee of future results. The advance/decline line is a simple measure of how many
stocks are taking part in a rally or sell off. This is the very meaning of market breadth. The formula for the advance/decline line
looks like this: A/D Line = (# of Advancing Stocks - # of Declining Stocks) + Yesterday's
A/D Line Value
18
Isaac Azimov
“When people thought the Earth was flat, they were wrong.
When people thought the Earth was spherical, they were
wrong.
But if you think that thinking the Earth is spherical is just as
wrong as thinking the Earth is flat, then your view is
wronger than both of them put together.
The basic trouble, you see, is that people think that "right"
and "wrong" are absolute; that everything that isn't
perfectly and completely right is totally and equally
wrong.”
Bold Statements
First of all, technical analysis is an art.
To state than an indicator does not work implies that they
know exactly how everyone uses it. Which is
impossible.
They should state that it does not work for them.
Absolutely, do not speak in absolutes.
What is This?
Pattern?
Japanese Candle Patterns
Developed using DAILY prices
Weekly is inappropriate
• Open = Monday’s Open
• Close = Friday’s Close
• High and Low can appear on any day
• What if the High and Low were both on Monday?
Intraday analysis is wrong
• The difference between the Close of one day and the
Open of the next is very important
• With intraday data, it is the next tick.
Stretching Technical Analysis too Far?
US Housing Starts
Analog Charts
These are overlays of essentially unrelated data, other than
being calendar based.
To me it is no different than believing you can determine
the next color by observing a roulette wheel.
Often there is such a long span of data that any arrows
used to help identify correlation are many months in
width.
Might be nice to see relationships, but absolutely nothing
you can use to make an investment decision.
Analog Charts
What is the Correlation?
A. Closer to 1
B. Closer to 0
C. Closer to -1
D. Can’t tell
Correlation = -1.0
How?
Correlation of Daily Returns
The process was:
• Day 1: Series A: +1.0%, Series B -0.5%
• Day 2: Series A: -0.5%, Series B + 1.0%
Over any period of multiple days, both series advance, but
they
do so in perfect
inverse daily
correlation.
Thanks to Adam Grimes
Correlation?
+1.0
Greg’s Rules
1. Turn off the TV and stop surfing the Internet for advice (stop
the noise).
2. Develop a simple process, one that you can explain to anyone
(mine is trend following).
3. Create a security selection process based upon momentum.
4. Devise a simple set of prudent and reasonable rules and
guidelines.
5. Follow your process with discipline; without it, you will fail.
6. If you do not have the discipline to do this, seek professional
help from someone who does.
7. Do not be upset with yourself if you do not have the discipline
at times; be proud of yourself for recognizing it.
8. Do not confuse luck with skill.
9. Listen and learn from the market – it is always right.
10. Read this list often.
Questions?
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