Blog - Reviews of Books and Web Sites

Following are the introductory paragraphs of entries summarizing CXO Advisory Group LLC reviews of selected books, web sites and methodologies offered via the blog.

March 10, 2010 - Review of the VT26 Volatility Breakout Strategy

A reader commented and asked: "It seems there are indeed systems in Collective2 that make money on a walk-forward basis even considering trading frictions. VT26 is one of them (for autotrading at Collective2, you can assume on average $8.50 per contract per round turn). How does this stand versus your skeptical approach?" The author of VT26 describes it briefly as a 100% automated volatility breakout system with priorities on steady profits and small drawdowns. He provides further description of the strategy in "Report on Systematic Portfolio VT26." Using trade-by-trade data for VT26 for the period 4/9/08 through 3/8/10 (2,279 closed trades over 23 months across ten futures markets), we find that: More...

February 17, 2010 - Review of Lussenheide's Basic Timing Strategy

A reader asked whether Lussenheide Capital Management's momentum timing mechanism (100-day NASDAQ Composite Index moving average crossings, with proprietary filter) beats buy and hold over the long run, noting that the company's web site presents at "Trend Following Performance" an independently validated annualized return of over 16% for "a very simple trend following system." The discussion of performance states: "The systems used here at...Lussenheide Capital Management Inc., uses [sic] this basic system, along with a mechanical, proprietary trading filter. Although our returns are comparable or better with those shown below, our system has more desirable characteristics, including fewer trades and less whipsaws amongst others." The notes at the bottom of the performance table state that results exclude "fund expenses" and "advisory management fees." Without the specifications for the proprietary filter, we can test only basic concepts directly. Using daily closes of the NASDAQ Composite Index and daily dividend-adjusted closes for various potential trading vehicles through 2/12/10, we find that: More...

February 16, 2010 - A Few Notes on A Trader's First Book on Commodities

In her 2010 book A Trader's First Book on Commodities: An Introduction to The World's Fastest Growing Market, author Carly Garner hopes to convey "the realization that anything is possible in the commodity markets. Never say never because if you do, you will eventually be proven wrong. Additionally, the markets, and trading them, is an art not a science. Unfortunately, there are no black-and-white answers nor are there fool-proof strategies—but that does not mean that there aren't opportunities." Her observations on success factors are largely experience-based, in an effort to provide "readers with a candid account of the realities of trading rather than fill them with unrealistic expectations," noting that "...the average retail trader has consistently been a net loser in the world of options and futures trading" despite falling commissions and increasing availability/sophistication of automated trading systems. Some notable ideas from the book are: More...

January 26, 2010 - Timothy Sykes: Penny Stock Pump-and-Dump Detective?

A reader requested a review of the trading methodology presented at TimothySykes.com ("Short Selling Penny Stocks"), which essentially uses price-volume analyses in attempts to detect in real time penny stocks being pumped and ride the ensuing downside (dump). Timothy Sykes, author of the An American Hedge Fund, is a former hedge fund manager and founder of BullShip Press LLC. His bio states: "Since the beginning of 2008, Timothy has been the #1 trader/investor, out of 25,000+ on Covestor.com." Using the record of 296 trades spanning 2/1/08 through 1/22/10 (including those previously posted for October 2009, but now missing) and some recent clarifications from Timothy Sykes, we find that: More...

January 25, 2010 - A Few Notes on Put Option Strategies for Smarter Trading

In his 2010 book Put Option Strategies for Smarter Trading: How to Protect and Build Capital in Turbulent Markets, author Michael Thomsett "explains all the put-based strategies [for individual stocks] in detail and shows how even a troubled market presents great opportunities to keep you in control. The worst aspect of volatile markets is a sense of not having control over events, and puts can be used to offset this apprehension. You have probably heard that astute traders can earn profits in all types of markets. Puts are among the best devices to accomplish that goal." Some notable points about the book are: More...

January 12, 2010 - Is Phil Erlanger's Research Exploitable?

A reader asked about Phil Erlanger Research: the Art of the Squeeze Play for institutional investors, which offers "research focused on delivering...advanced technical and sentiment research and data," and the companion Erlanger Squeeze Play for private investors, which identifies "short-term trading opportunities in both long and short squeeze plays." The core elements of this research are "short intensity and technical strength." The performance data on the two sites are identical, but more up to date at Phil Erlanger Research. Should investors expect that portfolios built on this research will substantially outperform the market? Based on weekly self-reported performance data and contemporaneous weekly data for S&P Depository Receipts (SPY) spanning 3/8/02 through 10/9/09, we find that: we find that: More...

January 7, 2010 - Testing Kaeppel's Sector Seasonality Strategy

A reader suggested looking at the strategy described in "Kaeppel's Corner: Sector Seasonality" and updated in "Kaeppel's Corner: Get Me Back, Clarence". The steps of this calendar-based sector strategy are:

1. Buy Fidelity Select Technology (FSPTX) at the October close.
2. Switch from FSPTX to Fidelity Select Energy (FSENX) at the January close.
3. Switch from FSENX to cash at the May close.
4. Switch from cash to Fidelity Select Gold (FSAGX) at the August close.
5. Switch from FSAGX to cash at the September close.
6. Repeat by switching from cash to FSPTX at the October close.

Does this strategy materially and persistently outperform? Using monthly adjusted closing levels for FSPTX, FSENX, FSAGX, a short-term interest rate composite as the yield on cash and the Vanguard 500 Index Investor (VFINX) as an investable broad index benchmark over the period January 1987 through December 2009 (23 years), we find that: More...

January 6, 2010 - Are Zacks Rankings Exploitable?

A reader inquired about the Zacks services. The core belief of Zacks Investment Research is: "Earnings estimate revisions are the most powerful force impacting stock prices." This belief underlies the Zacks "quantitative model to harness the power of earnings estimate revisions - the direction, the degree of change, and surprises - along with other important variables to create the Zacks Rank." The Zacks Rank feeds a range of information services that Zacks offers to investors. Should investors expect that portfolios built on the Zacks Rank will substantially outperform the market? Based on information available about the Zacks Rank and associated managed accounts/funds, we find that: More...

December 18, 2009 - The TimingCube Market Timing Advisory Service (Updated 12/19/09 to address reader comments)

A reader requested a review of the TimingCube market timing advisory service, which relies "on the Trend Timing Model to detect major trend changes in the broad market and to issue clear, definitive Buy and Sell signals, on average three to five times per year." The offeror provides a history of "all 'live' TimingCube signals since June 18, 2001." Using this record of 36 signals, daily S&P Depository Receipts (SPY) closes adjusted for dividends over the period 6/17/01 through 12/16/09 and daily closes of the S&P 500 Index over the period 8/30/00 through 12/16/09, we find that: More...

December 16, 2009 - The StocksandBulls.com Trading Advisory Service

A reader requested a review of the trading advisory service offered at StocksandBulls.com. The FAQs there state that the site "contains the information that is required to successfully trade the stock market on a regular basis with our 'home growned' robust trading system. From recommended buy and sell signals, all generated one day in advance to showing the end results, all is posted in total transparency." The FAQs further state that the methodology used is "capable of detecting logical and profitable buy and sell signals quite accurately on stocks, without any guesswork left for users to do." Using the trading record on site from inception on 2/13/06 through 12/14/09, we find that: More...

December 11, 2009 - A Few Notes on Trading from Your Gut

In his 2009 book Trading from Your Gut: How to Use Right Brain Instinct & Left Brain Smarts to Become a Master Trader, author Curtis Faith uses stories and examples to "show how to develop your intuition and confidence in the decisions of your gut instinct so that you can use your whole mind while trading." He preempts left-brained skeptics as follows: "If you are one of those traders who doesn't believe that gut instinct or intuition has any place in trading, I invite you to keep an open mind. I, too, once felt as you did. After all, I was trained to take a very systematic and logical approach to trading... I believed that it was important to keep your emotions in check." Some notable points from the book are: More...

December 9, 2009 - John Bogle Updates His Beliefs

In his 2009 book Common Sense on Mutual Funds: Fully Updated 10th Anniversary Edition, author John Bogle has "not altered a single word of the original edition, but [has] chosen instead to update its voluminous data, and to comment on significant developments that have occurred since then...", [trying his] "best to be candid in describing occasions when experience confirmed [his] insights of a decade ago, and when experience failed to do so..." One significant development over the past decade is the growing availability and diversity of Exchange-Traded Funds (ETF) as substitutes for mutual funds. Some notable reflections from the book are: More...

November 30, 2009 - A Few Notes on Fire Your Stock Analyst!

In his 2009 book Fire Your Stock Analyst!: Analyzing Stocks On Your Own (2nd Edition), author Harry Domash "describes practical step-by-step strategies for finding, researching, and evaluating investment candidates...one for growth stocks, and the other for value investors. ...The methods described make use of information readily available to anyone connected to the Internet, but in new ways..." The target audience of the book encompasses "investors willing to put in the time and effort it takes to find and research profitable stock investments." The culminations of the book (Chapter 18) are separate value stock and growth stock "analysis scorecards." Some notable points from the book are: More...

November 9, 2009 - A Few Notes on Day Trading Options

In his 2009 book Day Trading Options: Profiting from Price Distortions in Very Brief Time Frames, author Jeff Augen argues that individual investors operate at material informational and analytical disadvantages whether focusing on fundamentals or trend-based technical indicators. He has written this book"for investors who are seeking a different approach and are willing to work very hard to perfect new trading strategies." This different approach seeks to exploit "well-characterized pricing anomalies and distortions... [that] exist, in part, because contemporary option pricing models assume continuous trading... Today’s option market [responds to market down time] by varying the implied volatility priced into option contracts [thereby presenting a] profit opportunity [that] can become very large under certain circumstances." Also, "news events often introduce brief distortions that take many minutes for the market to digest. During these brief time frames the market becomes inefficient...[as detected by] a new technical indicator that can be used to quantify rising or falling volatility." Some notable points from the book are: More...

October 12, 2009 - A Few Notes on The Options Trading Body of Knowledge

In his 2009 book The Options Trading Body of Knowledge: The Definitive Source for Information About the Options Industry, author Michael Thomsett, "provides a market overview and discussion of risks, in addition to a comprehensive listing of strategies." He states that the "...book is designed for the options trader, whether a novice or skilled pro, who understands and appreciates the market issues." He states that the book "provides a very comprehensive explanation of how option premium develops based on various elements of value; calculation of returns from options and stock trading; federal taxation works in the options market; how stocks are picked for options trading; online and print resources; and a very complete glossary of terms that options traders will find valuable." Some notable points about the book are: More...

September 8, 2009 - A Few Notes on The Dark Side of Valuation

In the 2009 second edition of his book, The Dark Side of Valuation: Valuing Young, Distressed, and Complex Businesses, Professor of Finance Aswath Damodaran, investigates and offers remedies for "dark practices and flawed methods in valuation." He emphasizes "the importance of first principles in valuation and how they should guide us when we're faced with estimation questions and issues." As summarized in the closing chapter, the key enlightening propositions of the book are: More...

August 20, 2009 - Performance of the Value Line Select ETF Index

The Value Line Select ETF (VLSE) Index "is an equal-dollar weighted index comprised of between 30 and 100 U.S. traded ETFs ranked #1 by Value Line Publishing, Inc... The Value Line ETF Ranking System seeks to select the 'best-for-investment' ETFs among all U.S. traded ETFs...approximately 10% of all traded ETFs but no more than 100 ETFs. The Value Line Select ETF Index is rebalanced and reconstituted once per quarter... Upon Value Line Select ETF Index's introduction in 2008, the index values were computed on a daily basis dating back to 2003 to provide a historical frame of reference." Does this approach to ETF investing beat the market? Using self-reported daily performance data for the VLSE Index over the period 10/21/02 through 8/14/09 (almost seven years), and contemporaneous daily returns for S&P Depository Receipts (SPY) for benchmarking , we find that: More...

August 3, 2009 - Update: An Out-of-Sample Test of What Works on Wall Street (O'Shaughnessy's Cornerstone Strategies)

In the mid-1990s, James O'Shaughnessy identified the"cornerstone value strategy" and the "cornerstone growth strategy" as best-of-breed equity investment strategies. The former emphasizes dividends, and the latter momentum/earnings growth. Based on Standard and Poor's Compustat data, he found that the value (growth) strategy returned an average 15% (18%) per year over a backtesting period of 1952-1994, compared to 8.3% for the S&P 500 Index. He implemented these two strategies in late 1996 via mutual funds, and then publicized them in his 1998 book What Works on Wall Street: A Guide to the Best-Performing Investment Strategies of All Time. He subsequently sold the corresponding mutual funds (which apply slightly different portfolio formation rules from those specified in the original research) to Hennessy Funds in 2000, where they survive as the Hennessy Cornerstone Value Fund (HFCVX) and the Hennessy Cornerstone Growth Fund (HFCGX). Has a dozen years of out-of-sample performance of these two mutual funds confirmed the backtesting outputs? Using self-reported annual performance data for HFCVX and HFCGX, and annual returns for selected benchmark indexes for 1997-2008, we find that: More...

July 24, 2009 - A Few Notes on Reading Minds and Markets

In his 2009 book, Reading Minds and Markets: Minimizing Risk and Maximizing Returns in a Volatile Global Marketplace, author Jack Ablin, Chief Investment Officer for Harris Private Bank, seeks "to help individual investors gain a foothold in a fiercely competitive investment marketplace... My own approach to doing this is not a get-rich-quick scheme... To successfully outperform the market over the long term..., you need to learn how to read the market's mind, to figure out where the risk and rewards are most acute at any given point in time... I use the model and the tools I describe in this book every day of the week. ...I show you exactly how to do so..." The principal messages of the book are: More...

July 23, 2009 - A Few Notes on Full of Bull

In the 2009 edition of his book, Full of Bull, author Stephen McClellan seeks to "expose the puzzling and deceptive behavior of Wall Street that so disadvantages individual investors, tripping them up in their attempts to invest properly and rationally. It unscrambles the confounding practices of the Street in terms a layperson can comprehend. ...Once armed with an insider's understanding of all the Street's subtleties, you can be your own investment analyst." Stephen McClellan was a securities analyst for 32 years. The principal messages of the book are: More...

July 20, 2009 - A Few Notes on Quantitative Strategies for Achieving Alpha

In his 2009 book, Quantitative Strategies for Achieving Alpha, flagged by Jeff Partlow, author Richard Tortoriello "seeks to determine empirically the major fundamental and market-based drivers of future stock market returns" by testing over 1,200 alternative investment strategies. He believes "that the quantitative approaches outlined in this book can provide a proven way to generate investment ideas for the qualitative investor as well as a discipline that can help improve investment results." Richard Tortoriello is an equity research analyst with Standard & Poor's. The principal elements of the book are: More...

July 10, 2009 - Against the Gods: A Few Notes from the Summation

In his 1996 book, Against the Gods: The Remarkable Story of Risk, financial historian, economist and educator Peter Bernstein traces in narrative fashion the development of probability and statistics in the service of risk management. In the closing chapter, he offers a few overarching conclusions, as follows: More...

April 20, 2009 - A Few Notes on Outliers: The Story of Success

In his 2008 book, Outliers: The Story of Success, author Malcolm Gladwell argues for transforming outliers (extraordinary levels of individual success) from mysteries to rational outcomes by isolating explanatory factors and narrowing samples to instances exposed to those factors. There are aspects of the arguments presented in the book that are relevant for investors/traders, such as: More...

March 30, 2009 - A Few Notes on The Ivy Portfolio: How to Invest Like the Top Endowments and Avoid Bear Markets

In their 2009 book, The Ivy Portfolio: How to Invest Like the Top Endowments and Avoid Bear Markets, Mebane Faber and Eric Richardson "profile the top endowments and then examine how an investor can hope to replicate their returns while avoiding bear markets. The focus [is] on practical applications that an investor can implement immediately to take control of their investment portfolio." Mebane Faber "is the portfolio manager at Cambria Investment Management where he manages equity and global tactical asset allocation portfolios" and a co-founder of AlphaClone, an investing research web site. Eric Richardson is Chairman and founder of Cambria Investment Management. The book has a complementary web site that links to source materials. The principal messages of the book are: More...

February 10, 2009 - The NoLoad FundX Mutual Fund Momentum Approach (Revised 2/13/09 to address reader comments)

A reader offered:

"I suggest you test the performance of NoLoad FundX, a newsletter often cited as a violation of the Efficient Market Hypothesis. They offer decent data for an analysis. You can also use their mutual fund, FundX Upgrader (FUNDX), for 2008 performance."

The NoLoad FundX approach is essentially momentum-based (with funds rather than stocks), as follows: "Upgrading involves measuring near-term performance of mutual funds (twelve months and less) and comparing them to returns of other funds with similar risk. We invest in funds with the best recent returns, and hold them as long as they continue to outperform. When a fund drops in our ranks, we 'Upgrade' to the new market leaders." Using results of relevant research, the performance data presented by NoLoad FundX and actual performance data for the FUNDX mutual fund, we conclude that: More...

February 6, 2009 - The Mutual Fund Research Newsletter Quarterly Asset Class Allocations (Updated 2/7/09 to address comments from Tom Madell)

A reader requested:

"Would you add Tom Madell’s Mutual Fund Research Newsletter to Guru Grades?"

The most consistent thread in the Mutual Fund Research Newsletter archive for 2000-2008 is the quarterly asset class allocation (stocks, bonds, cash) recommendation. Variation in recommended allocations across nine years supports a rough assessment of general market timing value. This assessment is related to, but more quantitative than, the narrative forecast reviews for other experts at Guru Grades. Because of this difference, we are not including Tom Madell in the list of experts at Guru Grades. Using the 36 Mutual Fund Research Newsletter quarterly asset class allocation recommendations, along with contemporaneous quarterly returns for proxy assets, we conclude that: More...

January 26, 2009 - A Few Notes on Short Term Trading Strategies That Work

In his 2008 book, Short Term Trading Strategies That Work, Larry Connors, CEO and Founder of The Connors Group, shares "more than two decades of research and trading knowledge." He states in the introductory chapter:

"Philosophically, I live in the world of reversion to the mean when it comes to trading. What that simply means is that something stretched too far will snap back. I didn't come up with that idea. It's been around for decades. What I have done though is an attempt to quantify it."

Most of the quantifying tests use daily data spanning 1995-2007 for a large sample of stocks and the S&P 500 index. Based on past reviews of hundreds of anomaly studies, here are a few observations on the analyses presented in this book: More...

January 20, 2009 - Update: The Profit from the Peak Portfolio

In their 2008 book, Profit from the Peak: The End of Oil and the Greatest Investment Event of the Century, Brian Hicks and Chris Nelder examine the equity investment implications of a growing gap between a post-peak worldwide supply of energy from fossil fuels and a rising international demand for energy. They identify more than 70 companies that, in their judgment, are best positioned to exploit declining oil and gas supplies or "energy alternatives poised to power the years ahead." How have the stocks of these companies performed over the past few years and in the very recent past? Using monthly dividend-adjusted return data for the recommended stocks as available from Yahoo!Finance for the period December 2000 through December 2008, we find that: More...

October 28, 2008 - The Darlings of the Dow Strategy

A reader asked:

"Have you tested the Darlings of the Dow strategy developed by Larry Williams? He has modified his original strategy several times, and I wonder whether he made revisions because of new insight or because the original strategy proved not much better than the five cheapest Dogs of the Dow. What I find interesting is his timing of the Darlings with Sy Harding's MACD timing method and his buying the Dow Jones Utilities for the remainder of the year."

The original Darlings of the Dow strategy employs fundamentals to select the five most undervalued stocks in the Dow Jones Industrials Average and times entries and exits seasonally (enter in October and exit in April). The revised version chooses other entry and exit dates. To evaluate the strategy, we assume that the trading dates/returns for Darlings of the Dow stocks are as listed by Larry Williams and that returns while out of the Darlings are the adjusted returns for the iShares Dow Jones US Utilities (IDU). As benchmarks, we calculate returns based on adjusted closing values for S&P Depository Receipts (SPY) over the same intervals and average 90-day Treasury bill (T-bill) yields as an alternative to IDU returns. We use a test period of 2002-2007 (10/28/02-9/13/07) that is out-of-sample and post-publication with respect to the original strategy. We find that: More...

October 23, 2008 - Update: The Decision Moose Asset Allocation Framework

Reader Bob Tait of Houston suggested a review of the free Decision Moose asset allocation framework of William Dirlam. "Decision Moose is an automated framework for making intermediate-term investment decisions." Decision Moose focuses on asset class momentum, as augmented by monetary policy, exchange rate and interest rate indicators. Its signals tell followers when to switch from one index fund to another among nine encompassing a broad range of asset classes, including equity indexes for several regions of the globe. The trading system is a long-only approach that allocates 100% of funds to the index "having the highest probability of price appreciation." The site includes a history of switch recommendations since the end of August 1996. Mr. Dirlam provides background on the site and the Decision Moose framework via FAQs. To evaluate the framework, we assume that the 51 switches and trading returns are as described (out of sample, not backtested) and compare the returns to those for the S&P 500 index over the same trading intervals (based on all positions closed as of 10/17/08). We find that: More...

August 29, 2008 - Evaluating Investing/Trading Advisory Services

We occasionally get requests from readers to review the claims stated by an online investing/trading advisory service or investment manager. Most such web sites do not provide enough information to perform a quantitative review. Here is compilation of key points to consider in evaluating the claims of advisory services: More...

July 2, 2008 - Some Notes on Predictably Irrational

In his 2008 book, Predictably Irrational: The Hidden Forces That Shape Our Decisions, behavioral economist Dan Ariely "refutes the common assumption that we behave in fundamentally rational ways." Many of his observations have implications for investing and trading from the perspectives of avoiding irrationality as individuals and exploiting the systematic irrationalities of others. Based on his past studies of irrational behaviors, he concludes that: More...

June 26, 2008 - Update: Is ValueEngine's Stock Market Mispricing Summary Predictive?

A reader suggested that we evaluate the usefulness of ValueEngine, self-described as "a stock valuation and forecasting service founded by Ivy League finance academics" utilizing "the most advanced quantitative techniques and analysis available." ValueEngine offers a limited archive (20 weeks) of their free weekly newsletter that includes a "Summary of VE Stock Universe" within a section entitled "ValueEngine's Market Overview." This summary states the percentages of stocks undervalued and overvalued and the percentages of stocks undervalued and overvalued by at least 20%. If these summaries are meaningful, the net levels of mispricing they indicate should be to some degree predictive of future stock market behavior. Using the weekly mispricing summaries for 5/11/07-6/20/08 (a total 58 summaries, with none listed for 1/25/08) and contemporaneous weekly S&P 500 index data, we find that: More...

June 24, 2008 - Some Notes on The Halo Effect

In his 2007 book, The Halo Effect ...and Eight Other Business Delusions That Deceive Managers, Phil Rosenzweig argues for distinguishing carefully between sentiments (halos) derived principally from past bottom-line performance and fundamentals independent from that performance when assessing the excellence of companies and managers. Sentiments are essentially opinions expressed via "managers' ex post facto recollections, company statements, and articles from the business press." The distinction between sentimental and fundamental is important for investors/traders, as are his related conclusions about the value of experts and the inherent unpredictability of firm performance. Based on his review of prominent past studies of business excellence, he finds that: More...

June 23, 2008 - A Simple Test of Sy Harding's "Seasonal Timing Strategy" (Updated 11/6/08 to Append Performance Data Reported in MarketWatch)

Readers have inquired about the performance of Sy Harding's Street Smart Report Online, which includes the "Seasonal Timing Strategy". This strategy combines "the market’s best average calendar entry [October 16] and exit [April 20] day with a technical indicator, the Moving Average Convergence Divergence (MACD), or MACD." According to Street Smart Report Online, applying this strategy to a Dow Jones Industrial Average (DJIA) index fund generated a cumulative return of 142.6% over the period 1999-2007, compared to 72% for the DJIA itself. We test this strategy here using a different index fund over a longer period. Using daily dividend-adjusted closing prices for the S&P Depository Receipts Trust (SPY) from 1/29/93 (the earliest available) through 6/19/08, we find that... More...

June 19, 2008 - Testing the "Short Term Stock Selector" Designed by Robert Hesler

A reader inquired about the "Short Term Stock Selector" designed by Robert Hesler, which "has provided neural network generated swing trading predictions [approximately daily] since 1996. ...All buy and sell recommendations are based on 19 technical indicators. Some indicators pertain to the market in general while others pertain to individual stock attributes." We focus for this review on the most profitable type of trades (Type A), for which the site claims a 66.3% win rate and a 40% annual return on investment over the period 4/11/96 through 6/17/08. Using the detailed listing of 12,340 closed Type A trades over this period, we find that... More...

May 19, 2008 - Testing the Palisades Research Daily Stock Market Forecasts (Revised 5/27/08 to Append/Address Comments from John Vitale)

A reader requested that we test the stock market forecasts of John Vitale as posted via daily stock market commentary at the Palisades Research web site. The Palisades Research forecasting method involves "a statistical approach to market trading. The technique is unique and proprietary. It relies on two basic elements, 'money flow' and 'investor emotion.' ...The total effort of this program goes into forecasting the direction of the S&P 500 index for the single following day. ...Our main program indicates that the next day’s direction can be forecast with a 60% – 70% reliability compared to 53% with buy and hold, but even this is very difficult to maintain in real life." In this review, we use both regressions and rankings to test the accuracy of the forecasts. Using the record of daily Palisades Research stock market commentary over the period 5/16/06-5/15/08 (499 daily forecasts) and next-day daily opening levels for the S&P 500 index and the Nasdaq 100 index over the same period, we find that... More...

April 29, 2008 - Testing the AlphaKing Trading Indicator

Robert Bendekgey of AlphaKing requested inclusion in the list of gurus at Guru Grades based on the service's market predictions. "The AlphaKing Research Project was started in 1999 to answer once and for all the age old question of what is the best way to risk one's capital in the stock market." This research culminated in the AlphaKing Trading Indicator (based on Nasdaq Composite index behavior), claimed to encapsulate the following conclusion: "Great fundamentals, when used in conjunction with specific targeted chart patterns, along with targeted beta leverage, while using active defensive and offensive money management techniques on individual stocks once entered, while timing portfolio entry and exit based on stock market trends has proven to provide maximum returns with the least amount of volatility..." Because this indicator is explicit and mechanical, we evaluate AlphaKing as a method and not as a guru. Using the record of the AlphaKing Trading Indicator and contemporaneous daily opening levels for the Nasdaq Composite index over the live out-of-sample period 3/27/06 through 3/28/08 (505 trading days), we find that... More...

April 22, 2008 - Testing the COTs Timer Trading System (Revised 4/26/08 to append comments)

A reader inquired about the COTs Timer trading system, which employs information from the Commodity Futures Trading Commission's (CFTC) combined futures and options Commitments of Traders (COT) reports to time the markets for associated assets. In describing these reports, COTs Timer states that: "Devoted fans say they may be the closest thing in the public domain to a Holy Grail of market forecasting." The author (Alex Roslin, a journalist) outlines nine steps that take ten minutes each week to exploit COT report data and states: "I've been using my COTs-based system to invest my family's savings since January 2007." He presents the long-term performance of his system across asset classes and offers detailed weekly data and analysis, including buy and sell signals, for S&P 500 index COT reports dating back to 5/16/95. Using these signals and contemporaneous weekly opening levels for the S&P 500 index over the period 6/12/95 through 2/25/08 (663 weeks), we find that... More...

March 6, 2008 - A Rough Test of the Concept Underlying the BMW Method

A reader inquired about a test of the BMW Method, defined as follows:

"I trust the CAGR. That is the compound average growth rate. I look back 30 years to get a base number to work from and I then calculate the range of CAGR's that encompass the full range of stock prices over that 30 year period. The curves are extended into the future by 5 to 10 years and I have a complete picture of what has been and what can be if the business just rolls on along. I buy stocks when they are priced significantly below the lowest historical 30 year CAGR. It happens often. If I cannot find a business that is significantly below the low CAGR, I will settle for some that are on their 30 year lows or just below that level. These do not enthuse me nearly as much, but they will rebound also. The history proves it. This is a definite buy low, sell high concept...except it works. In fact, I want anyone to explain in detail how it cannot work."

This description is not a precise specification. To test the underlying concept, we hypothesize that the short-term compound growth rate of a broad market index tends to revert to a longer-term compound growth rate. If we enter the market after intervals of relatively low short-term growth and exit after intervals of relatively high short-term growth, we may be able to outperform a buy-and-hold strategy. We use the S&P 500 index to represent the stock market because of its long history. For trading precision we use daily closing levels of the index, with one-year intervals for the short-term growth trend and 30-year and five-year intervals for the long-term growth trend. Using S&P 500 index closing levels for 1/3/50 through 3/3/08, we find that... More...

February 28, 2008 - Review of Between the Hedges Net Portfolio Position

A reader suggested that we evaluate the performance of Between the Hedges, a "portfolio manager's commentary on investing and trading in the U.S. financial markets." One prominent and systematic feature of the commentary in that blog is the daily net portfolio position, expressed as percentage long. This position changes frequently, and the portfolio manager presumably manages it to exploit expected short-term trends in the broad stock market. If the expectation has value, the net portfolio position should relate positively to near-term broad market behavior. Using the Between the Hedges daily net portfolio position for 2/2/04-2/26/08 (1,024 trading days) and contemporaneous daily data for the S&P 500 index, we find that: More...

February 22, 2008 - Review of Tony Caldaro's "Objective Elliott Wave" Outlooks (Revised)

[Revised to incorporate 2/21/08 comments from Tony Caldaro, as appended.]

Several readers have requested that we evaluate the market timing value of Tony Caldaro's "Objective Elliott Wave (OEW)" analysis. Mr. Caldaro describes OEW as incorporating missing tenets, such that: "Applying these newfound tenets to the market, ...the waves were crystal clear. The turning points were precise, to the day, because they were quantitatively derived. There was no question when a wave ended and another began." Based on the record of "MEDIUM TERM" outlook synopses in Tony Caldaro's daily commentary blog and contemporaneous daily data for the S&P 500 index over the period January 2006 through January 2008 (523 trading days), we conclude that: More...

February 18, 2008 - Robert Taylor's Peculiar Definitions of Up and Down

Reader Jeff Miller requested that we evaluate the market timing value of the "Xyber9 Market Forecasts", as developed and presented by Robert Taylor, CEO of Trend Corporation, Inc. The company's web site states that Robert Taylor "was nominated for the Nobel Prize in Economics in March of 2000 for his work in proving the stock market to be predictable and not random as previously thought." It further claims that the Xyber9 program, "an Aero-Space system identification program originally developed for NASA and their rocket program," provides "market forecast accuracy...unsurpassed by anyone." However, using Robert Taylor's trend definitions and daily highs and lows for the Standard and Poor's Depository Receipts Trust (SPY) over the period February 25, 2006 through February 15, 2008 (497 trading days), we find that: More...

February 13, 2008 - Update: The Mojena Market Timing Model

Mojena Market Timing, developed and maintained by retired professor Richard Mojena, presents a method for timing the broad U.S. stock market based on the combined power of eleven indicators to predict changes in intermediate-term and long-term market trends. These indicators encompass monetary, fundamental, technical and sentiment perspectives on market conditions. Professor Mojena offers a theoretical backtest of the timing model since 1970 and a live investing test since 1990. Focusing on the latter as evidence free of data mining bias, we find that: More...

February 6, 2008 - Review of IntelligentValue's Retracement-Value Portfolio (Revised)

[Revised to incorporate 2/5/08 comments from Christopher Michaels, Publisher of IntelligentValue.com, as appended.]

A reader poses the following question:

"Have you looked at IntelligentValue? They claim pretty impressive results, apparently certified by FinancialContent. Their Retracement-Value portfolio, particularly, shows impressive results ["508% in its 1st 18.5 months!"]. Are you able to evaluate this newsletter service?"

Based on the information provided on IntelligentValue's web site, especially the closed trade analysis for the Retracement-Value portfolio (171 round-trip trades, apparently from portfolio inception on 5/16/06 through 1/9/08, with a starting portfolio value of $10,000), we conclude that: More...

January 31, 2008 - Review of Mark Leibovit's VRTrader.com "Track Record"

Several readers have requested that we evaluate the expertise of Mark Leibovit, Chief Market Strategist for VRTrader.com, According to VRTrader.com: "His technical expertise is in volume analysis, providing short-term, high performance stock trades and market timing..." Based on the information provided at VRTrader.com, especially the "Track Record" encompassing 3,388 round-trip trades during 2001-2007, we conclude that: More...

January 23, 2008 - Review of Befriend the Trend Trading's Trend Trades

A reader asked: "Please evaluate the performances of the The Trend Trade Letter and The Cheap Stocks Letter offered by Befriend the Trend Trading." We focus here on the The Trend Trade Letter, which has a much larger sample of historical trades than its sibling. Both the company and newsletter names imply a momentum-centric trading approach. The newsletter focuses on fairly continuous short-term technical trading (long and short) of liquid, volatile stocks with no more than ten positions at a time. Based on the information provided on the Befriend the Trend Trading web site, especially the monthly closed trade lists for The Trend Trade Letter (over 1,300 round-trip trades, from inception on 10/7/02 through 12/11/07), we conclude that: More...

December 17, 2007 - The Black Swan: The Impact of the Highly Improbable (Chapter-by-Chapter Review)

In his 2007 book The Black Swan: The Impact of the Highly Improbable, Nassim Taleb addresses human inability to process natural randomness, particularly combinations of low predictability and large impact. "It is easy to see that life is the cumulative effect of a handful of [largely unpredictable] significant shocks." This logic "makes what you don't know far more relevant than what you do know." Models that ignore this logic (such as those assuming Gaussian probability distributions for financial variables) inculcate mistakes that "can lead to severe consequences." Focusing principally on the perspective of an investor, here is a chapter-by-chapter review of some of the insights in this book: More...

October 29, 2007 - The Little Book That Makes You Rich: A Proven Market-Beating Formula for Growth Investing (Chapter-by-Chapter Review)

In his 2007 book The Little Book That Makes You Rich: A Proven Market-Beating Formula for Growth Investing, Louis Navellier, Chairman of the Board, Chief Executive Officer and Chief Investment Officer of Navellier & Associates, Inc., outlines his systematic approach to investing in timely growth stocks. This approach derives from his analysis-based belief that the market does not efficiently incorporate key indicators of growth into stock prices. Here is a chapter-by-chapter review of some of the key points in this book, along with some links to relevant research summaries: More...

December 11, 2006 - Evidence-Based Technical Analysis: Applying the Scientific Method and Statistical Inference to Trading Signals (Chapter-by-Chapter Review)

In his 2007 book Evidence-Based Technical Analysis: Applying the Scientific Method and Statistical Inference to Trading Signals, David Aronson opens with two contentions: (2) "much of the wisdom comprising the popular version of TA does not qualify as legitimate knowledge;" and, (1) "TA must evolve into a rigorous observational science if it is to deliver on its claims and remain relevant." Taken in parts, this book offers sound met hods for analysis. Taken as an integrating whole, it offers insightful context for evaluating a broad range of financial analyses/claims presented by others. Here is a chapter-by-chapter review of some of the insights in this book: More...

July 3, 2006 – Update: Testing the Indicators of Barchart.com

Many months ago, reader Harry in Minneapolis MN suggested that we review the performance of the technical indicators at Barchart.com. This site offers free short-term, intermediate-term and long-term technical assessments of stocks and exchange traded funds (ETF). Barchart.com, Inc. claims that their "market information is being used by millions of investors every month." An obstacle to assessing the usefulness of their technical indicators is unavailability of historical data. To overcome this obstacle, we have recorded their average indicators for S&P 500 Depository Receipts (SPY) daily to assemble a statistically meaningful history for that ETF, which tracks the S&P 500 index. Whenever an indicator average is "Hold," we assign a value of 0%. From the seven months of data collected, encompassing both market advances and declines, we conclude that: More...

March 24, 2006 - Stock Trading Wisdom in the Crowd of AI Software?

Reader Eric poses the following question:

"Have you evaluated and compared TradingSolutions 3.1 versus DeepInsight in terms of accuracy and usability?"

From the supplier's web site: "TradingSolutions is a comprehensive technical analysis software package that helps you make better trading decisions by combining traditional technical analysis with state-of-the-art neural network technologies." And: "DeepInsight combines quantitative analysis with Artificial Intelligence to analyze trading patterns and market data in a great depth, and therefore, predict and catch trends in early stage for individual stocks, ETFs, mutual funds and market indices." We do not do product evaluations, but can offer some research-grounded observations on acquiring and using artificial intelligence (AI - neural network, expert system, genetic algorithms...) software to guide stock selection and trading performance. Specifically: More...

January 6, 2006 - Probability Theory, The Logic of Science: A Few Notes

Because economics and financial markets lack mature theoretical (deductive) foundations, these fields involve largely empirical (inductive) work. The principal mathematical tools in this pursuit derive from probability and statistics. In his 2003 book Probability Theory, The Logic of Science, E.T Jaynes presents in textbook form his own evolutionary growth in the understanding of probability theory. His approach is Bayesian, in that he views probabilities as conceptually distinct from frequencies of occurrence and probability theory as synonymous with the process of inductive inquiry. He emphasizes iterative "plausible reasoning" as the kernel of probability theory. He offers a few summarizing points relevant to equity investors/traders, as follows: More...

December 28, 2005 - Reinventing The Bazaar, A Natural History of Markets: A Few Notes

In his 2002 book, Reinventing The Bazaar, A Natural History of Markets, John McMillan offers an overview of recent research on the workings of markets. His perspective is empirical rather than ideological as he examines economies worldwide to infer when markets work and when they do not. Some summarizing points on critical factors for economic growth are relevant to equity investors considering international diversification, as follows: More...

November 19, 2005 - A Few Notes from My Life as a Quant, Reflections on Physics and Finance

In his 2004 autobiography, My Life as a Quant, Reflections on Physics and Finance, Emanuel Derman recounts his experiences as a physicist driven by the forces of employment supply and demand to redirect his labor toward quantitative financial analysis/strategy. Knowledge and skills critical to his transition are: a sense of how the world works, modeling and programming. Much of the book is a straightforward recounting of activities, personalities and reactions, culminating in Mr. Derman's derivatives modeling accomplishments. Toward the end of the book, he offers a few essential distillations, as follows: More...

October 3, 2005 - When Stock Market Models Crash

Didier Sornette, Professor of Geophysics at UCLA, has an interest in financial markets as examples of complex systems. He authored Why Stock Markets Crash : Critical Events in Complex Financial Systems, published in November 2002. He has maintained on his web site for several years a series of predictions regarding the behavior of the S&P 500 index. In initiating this series, he wrote:

"Based on a theory of cooperative herding and imitation working both in bullish as well as in bearish regimes that we have developed in a series of papers, we have detected the existence of a clear signature of herding in the decay of the US S&P 500 index since August 2000 with high statistical significance, in the form of strong log-periodic components."

His September 2002 paper (with Wei Zhou) entitled "The US 2000-2002 Market Descent: How Much Longer and Deeper?" provides a detailed justification of this assertion, including a comparison of the 1990 Japanese and 2000 U.S. stock market crashes. In this entry, we trace the evolution and assess the accuracy of Professor Sornette's predictions, as follows: More...

September 26, 2005 - Fooled by Randomness: A Review

Nassim Taleb's central theme in Fooled by Randomness (the 2004 second edition) is that noise generally swamps signal (true outperformance or underperformance) in financial markets, and in life generally. A standard deviation much larger than an associated average excess return, encountered consistently in the search for outperforming investing/trading strategies, is an indicator of such swamping. The book effectively uses corollaries and examples to reinforce Nassim Taleb's contention that past performance is neither a guarantee of future returns nor a proof of either intelligence or stupidity. Rather than recount his arguments, we focus this review on his conclusions as they relate specifically to speculating in financial markets. These conclusions are: More...

September 20, 2005 - Fooled by Consciousness

As noted in our blog entry of 7/17/05, a couple of readers have strongly recommended Fooled by Randomness by Nassim Taleb as a valuable resource for investors/traders. We have begun the book (the 2004 second edition), and our more-than-passing familiarity with modern physics makes it a generally comfortable intellectual environment. Here is one initial reaction about being (profoundly) "fooled"... More...

September 15, 2005 - Reader Question on a Market Forecasting Product

Reader Dennis in Sioux Falls SD recently posed the following question:

"Have you studied VantagePoint software from www.tradertech.com?"

The offeror of this software (Market Technologies, LLC) claims: "With nearly 80% accuracy, VantagePoint Trading Software gives you the edge you need when trading Futures, Commodities, Forex and ETFs. When you use VantagePoint market forecasts, you will no longer feel the stress of chasing marginal trends and spending countless hours buried in analysis without being rewarded for your efforts." We have not previously looked at VantagePoint but did so after receiving the above query. The promotional material available on www.tradertech.com regarding how the software works is thin, so there is not much publicly available information to study. Parsing the offeror's disclaimer is somewhat helpful, as follows: More...

July 29, 2005 - Damodaran Online: Some Serious Education

The Professor Aswath Damodaran of the Leonard Stern School of Business at New York University offers on his web site a broad and deep set of financial education materials covering: corporate finance, investment (portfolio) management and valuation. He presents considerable information from his books, such as Investment Philosophies and Investment Fables, including supporting data. For example... More...

May 6, 2005 - Detecting Wisdom in a Crowded Market

In The Wisdom of Crowds: Why the Many Are Smarter Than the Few and How Collective Wisdom Shapes Business, Economies, Societies and Nations, James Surowiecki identifies and discusses the three conditions necessary for a crowd to make good group decisions. Applied to the stock market, good decisions means stock prices that reflect the true values of underlying assets. As depicted in the figure below, the three conditions are: More...

March 31, 2005 - Focus Investment in Foreign Markets?

The authors of Triumph of the Optimists counsel strongly in favor of as much diversification as possible across markets to minimize country risk, thereby achieving Sharpe ratio nirvana. However, in The Anglosphere Challenge: Why the English-Speaking Nations Will Lead the Way in the Twenty-First Century, James Bennett implicitly advises focusing investments in certain countries. As depicted in the figure below, Mr. Bennett's main thesis points are that: More...

February 1, 2005 - Triumph of the Optimists: Chapter-by-Chapter Review

On the advice of Victor Niederhoffer, we have obtained and read Triumph of the Optimists: 101 Years of Global Investment Returns by Dimson, Marsh and Staunton (2002). Vic says that "if you read one investment book, this should be it." The book is thorough, logical and concise. With scores of illustrative graphs and figures, its statistics are accessible and its style straightforward. Its message, however, is somewhat at odds with the title. Below is a chapter-by-chapter review of the insights in this book: More...