Objective research and reviews to aid investing decisions
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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...
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 June 2008, we find that: More...
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...
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...
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...
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...
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...
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...
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...
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...
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...
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...
[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...
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...
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...
[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...
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...
A reader makes the following request:
"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...
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...
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...
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...
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...
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...
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...
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...
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...
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...
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...
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...
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...
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...
Financial modelers often dubiously employ in-sample testing (backtesting), wherein the data used to develop a model are also the data used to test the validity and economic value of model predictions. After reading Chapter 3 of Jason Kelly's book The Neatest Little Guide to Stock Market Investing (2004 revision), which summarizes the "cornerstone" investment strategies developed by James O'Shaughnessy, we devised out-of-sample tests for these two strategies. Mr. O'Shaughnessy developed these strategies using data from Standard and Poor's Compustat database for the years 1952-1994. He then implemented the strategies in late 1996, via mutual funds, and publicized them in his 1998 book What Works on Wall Street: A Guide to the Best-Performing Investment Strategies of All Time. How well have the mutual funds performed? More...
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...
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...
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...
