TtM says we may have a trend developing

Market Date: 10.13.2014

Market Mood Barometer

Last week we introduced the Market Mood. The barometer is an inherent component of TtM and gives us the current overall Market Mood. The mood is derived from a cross section of the entire US market and includes TtM rollups from individual stocks, ETFs, and indexes. This is not your typical “stop light – red/green” indicator. The TtM barometer (current settings) generates a value between approximately 6.48 (Bull Happy) and -6.47 (Bear Angry). The Market Comment is an implementation of my current investment strategy (more like an advisor rather than fact).

As of a recent mid-day update the current value is -4.08. The general recommendation is to position my portfolio at a mix of approximately 25% Long and 75% Short (with some cash). What this means to me is I should begin positioning my portfolio to this mix. I will not run to my broker and buy/sell everything to arrive at this mix immediately. I will start moving towards this mix in my portfolio. With the frequency of the market perturbations right now, who knows where it will be tomorrow. Last week when the barometer was cycling between Complacent and Anxious the barometer was in what I call the “No man’s land.” The recommended mix in this area is either a Hedge (equal parts Short and Long) or Cash (no risk). Now the barometer is showing a definite trend towards a Bear market.

I don’t know about you but with the market volatility we’ve seen lately, I doubt if the Market Mood will stay Cynical for long. However, at this time the market has dipped into the Cynical mood. That’s why I’ll just move in that direction rather than jump on the recommended mix.

Let’s take a look at this on a graph. This graph shows the Market Mood for the past few days and is color shaded to represent the Market Mood. This is not a direct artifact of TtM so we won’t see this graph on a regular basis.

What’s nice about the graph is you get a visual of the mood over several days. When I present this graph it will generally show the mood for the past week or so. Maybe once a month I’ll generate this graph for the previous month. It’s labor intensive to generate this so we’ll see how often we want to see the longer time period. Let me know if you would prefer two weeks as opposed to a single week. At any rate this is what it looks like today.

Let’s take a look at our strategy. If you are not familiar with a N2 (N-squared) diagram you might want to research it.  Note: Yes, I may be scientific and factually inclined and I do use Wikipedia.org as a reference quite often. I also provide support to Wikipedia.org as well as other sites that provide services (license free services). Anyway, the following figure is my current Portfolio Allocation Model as shown in an N2 diagram.

 

This diagram is a bit busy but this is an opportunity for us to get on the same page with the TtM strategy and how we use the TtM system. As of today (mid-day) we have a Market Mood that has dipped into the Cynical mood. Last week the market was, for the most part, in the Complacent mood. Therefore, my target portfolio mix is approximately 20% Long and 80% Short (or 100% Cash for those who do not short securities). Within TtM each of the moods between Happy and Angry have two sub-moods (+ and -). The N2 diagram that includes the sub-moods may be more accurate – but is really ugly so we’ll work with this higher level version. This is ok though – we are still keeping with the basic principles of TtM. Provide a mechanical tool which:

• Relieves (or at least reduces) the anxiety associated with investing in the market
• Provides personal investment options
• Provides support for risk management of investments
• Reduces time and complexity of market investing and management of those investments
• Eases the overall pain and risk of investing in the market
• Improves the probability of success with investing

Introducing the 2 Day Long and Short Reports

Ok, now we have a possible trend and TtM says it’s time to look at changing the portfolio allocation (from 50% Long, 50% Short) to 20% Long, 80% Short. There are a couple of ways to do that. In my case (let’s say I was 50% SPY, 50% SH) I could reduce the position in SPY to 20% and increase SH to 80%. Easy! I’m not ready for more aggressive stocks yet… I don’t know if this trend is real so I’d rather take a little less to manage risk.

However, I will start looking at both the Long and Short reports. I’ve mentioned these before and now, it is time to dig a little deeper. The Long and Short reports are generated daily and include those securities in the TtM Catalog (our universe of securities) which have changed state either today or yesterday (the previous trading day). Today’s Long Report is shown below.

Let me explain some of the data on this report. To me this data is really the TtM discriminator. I have never seen a system that with a push of a button can tell you what securities you may want to consider for investment today. An explanation of the fields on this report.

Trailing Stop (%) – No more guessing (or stressing) about this value. TtM (actually SM2) generates this value to avoid “head fakes” but catch a trend as early as possible.   Conversion (% to $):

Long = (1.0 – (TS% / 100.0)) * Last Trade $

Short = (1.0 + (TS% / 100.0)) * Last Trade $

TtM Portfolio – TtM initializes the portfolio value to 1.00 on day 1 of its training period (during the data series characterization process). All reports generated for tradethemoods.com are generated with a short/long viewpoint. What this means is the symbols accrues gain in both states (as if you traded long => short => long… on state changes). Therefore for a portfolio of 1.66, the symbol theoretically would have gained 66% over its TtM life. The TtM life is both the training period (sample size) and monitoring phase. The shorter the monitoring phase (time since last characterization update), the more accurate TtM’s results.

Current State/Mood – For the Long Report I would expect these to be “Bull” and “Happy.” Conversely, for the Short Report I would expect “Bear” and “Angry.” However, it is not uncommon to see another mood on symbols that have been in state for a couple of days (see Days In State). This means the security saw an unusual excursion and back off the next day. TtM certainly tries to avoid this situation but the market is the market.

Win Probability (%) – TtM has a proprietary method of calculating the probability that you will at least get your money back on an investment. The higher the number of trades, the more accurate this estimate is. Since TtM keeps the number of trades to a minimum (my strategy), this value is an estimate used for risk management.

Risk ~= 1.0 – (Win Probability / 100.0)

Now let’s look at the Short Report

Report Analysis:

To be honest, with the market volatility I’d rather stay with a more stable index that I can short as well as buy (long) such as SPY and SH or, QQQ and PSQ. That’s just me though. Out of these reports I might be inclined to look at KND (in the Long Report) more closely. First, TtM has an algorithm to rate each of the securities on these reports based upon overall risk.  Each symbol has a rating between 0 and 10. KND was rated overall at 3.57 (3.57 is not all that bad since the algorithm is very conservative). Also, let me mention that each of these report (Long and Short) had many entries that did not make the TtM cut as far as investment risk.

Long Report = 40 entries

Short Report = 128 entries

Other data I look at as part of the investment analysis include:

Today’s Gain = -2.43 (when I ran the report KND had lost 1.43 for the day. It ended at -2.43)

Price Range = 46.27% (this is where the last price fell with respect to the sample high. PR = (sample high – last price) / (sample high – sample low)

Delta Volume = 121% (Delta Volume = (today’s volume – average volume) / average volume). Today’s gain (-2.43) had legs… not good

Let’s look at the graph for KND.

TtM drew this graph with the default settings (KND price and TtM state). Although TtM beat the “buy and hold” strategy by 12.8% I don’t like the tendency for large price excursions. Sometimes I would have been on the right side and others not.

Overall, I think I’ll pass on KND. You often find little gold nuggets in the Long and Short reports. Not today.

Summary

We’ve covered quite a bit today.

We see a potential trend developing (Bull to Bear). For the Long only investors it is time to go to cash. For the Long/Short investors, I’d be looking at somewhere around 25% Long and 75% Short (with some cash).

Since we are now looking at possible additions to our portfolio I introduced the 2 Day Long/Short reports. These show those securities recommended by TtM for investment consideration. This doesn’t mean you would run out and invest in these without doing more homework. For KND we looked at some indicators and determined it wasn’t something we wanted to invest in today.

We looked at a graph of KND that shows the stock price and also TtM’s state. The elegance of TtM is it’s simple representation of a very complex solution; what state is this symbol in from an investment standpoint and how long has it been in that state.