I have been a student of the market and technician for over 50 years. I have focused on long term cycles in stock prices and industry sectors. The most powerful wisdom I have been able to garner has been the work I have done with Raymond Hanson Jr. Together we identified what I would call the lowest common denominator in identifying the beginning of a stock’s super cycle. Once the qualifying issues are identified and sorted into industry groups, the investor has a truly non random expectation of substantial long term gains. As it states in our book from 1977 , “The concept of cyclicality implies profits — Consistent, non random profits.” Using the logic in the study is simple. The rules are simple but the execution is not. Why? Because it runs against the tide of human greed, fear and impatience.
Anyone who has studied this work cannot deny the conclusions. In fact an institution has asked me to update my research to include the years 2003 – 2013. The results were absolutely amazing. I am willing to share my conclusions with any students of Non Random Profits.
Most of my career has been trying to find a way to make it easier for my investors to hold these issues long term. I have tried a lot of different strategies even attempting to insure client accounts if they held through the cycle. In my case the insurer did not work out.
Diversification, trimming positions on gains all helped, but investors find it difficult to hold lower priced stocks especially when market averages are rising and their portfolio is not rising as much. History has proven that the value of holding these issues for four or five years has been beyond expectations.
I have never given up trying to solve this issue. This has led me to use new technologies such as AI and specialized cloud based systems to help me lower investment volatility.
Today we are at the opposite pole from qualifying bottoming cycles in stocks and most industry groups. If you look at the long term charts of the major indices they are mountain charts not valleys. Everyone knows that stocks are high and risks are high, but greed is a force and staying the course is less difficult than making big changes. No one wants to miss out on the last 5%. This is why most investors lose in big declining markets. They listen to talking heads and believe fake news, propaganda and common beliefs which are not true.
If we must be invested I want to keep risks low on every asset we hold. Today we are in a pop and drop market. Nearly every stock that has a big pop drops again fairly quickly. The opposite also occurs where stocks drop quickly and then pop back up.
We can take advantage of this type of market but we must keep risk to a minimum on every issue we buy or sell. I use stop orders on every position usually less than 2% unless the stock is low priced where the potential is great and greater volatility must be accepted. The exception would be what I would call alpha stocks because they are driven by circumstances unrelated to the stock market like breakthrough biotechs or new technologies.
Follow The Money:
In a highly valued market there are unusual opportunities like takeovers, big court cases, FDA approvals. The reverse can be the case also like losing a patent suit or losing an extremely large customer or a debt issue that cannot be easily solved. Big money often knows about these issues before we do, so monitoring big money movement makes sense. ACI uses two sources to be early on following the money:
The Dark Pool
The dark pool is an institutional trading market where institutions trade with each other and often report their trades late. These trades can be monitored through Schwab and Lightspeed. Sometimes the institutions trade through their London facilities and may report a day or more late. Following the most massive trades and using technical tools can be a tremendous advantage.
Massive option buys are reported to us moments after execution by Trade-alert.com, a specialized institutional service. Buying or selling these stocks often leads to being an early investor especially when the trades are massive, covering all option exchanges and the size of the transactions are an odd numbers of options. This indicates that the buyer took every option available at this price. It is important that the buyer pays the ask price or higher and that the time frame is relatively short. Also the option call price plus the option premium should be a good amount higher than the current stock price if it is a buy. Many times we find out why later.
The Najarian brothers use this type of service and claim that it is their most successful method of finding profitable stocks.
Artificial Intelligence and Stock Scanners
We use Trade-Ideas LLC. services to find stocks that have high odds of capturing the attention of traders. These stocks could have a powerful news catalyst or have fast growing buyer interest as reflected in volume. Early in the morning the scanners pick up unusual activity in social media. Trade- Ideas AI system makes millions of calculations each night to find the algos that have the highest probability of success the next day. Then based on live stock activity the AI system gives buy and sell decisions in real time. It is like counting cards in a casino. You may find links to trade-ideas.com on this website. I would encourage you to learn more. After you use the link, go to the trade-ideas website at www.trade-ideas.com, click on trading room, set up a password and monitor their trading room for free. You will be amazed at the daily profitable activity that takes place there as traders use the scanners and share ideas. Other trading rooms cost as much as $4000 or more per year and they are no better.
I caution you that regardless of your investment experience it takes a year or more to learn these new skills and it can result in large losses until you have learned this art. The main skill is to keep risk low. Investment advisors will find this difficult because it is not what they are used to.
Our ideas come from these sources plus today we are looking for fully ripened stocks that have risen dramatically and now have an angle of increase that has become unsustainable. These are stocks for put buys or for shorting against call options.
To attempt to keep up with market indexes we use ETF’s during the day when markets are in uptrends. We use close stops for risk management. Keltner bands are used to assess the risk/ opportunity. For the past ten years buying at or below the low band and selling at or above the high band has worked well. Reverse index funds and put options help to reduce portfolio risk in market declines.
It is important to allocate appropriate to each position. A position should be sized so that an unexpected news item should not affect the portfolio more than 2% normally and on an oversized special situation not more than 5%. The risk/ reward is formulated by comparing the stop loss price to the opportunity calculated by the stock moving to the next resistance level attained from a daily chart. The risk/reward should be two to one or greater before making a trade.
High Alpha Stocks
High Alpha stocks are securities that are being repriced based on a new opportunity and not because of market conditions. Example would include breakthrough research by biotech stocks, new, exciting products in big market opportunities especially brand new technologies which may be unique.
A few high alpha small stocks we like are WRTC, VERI,WKHS, RADA, WPRT and AMRN.
Video link for YouTube on VERI: https://youtu.be/rM6qUd3zm1U
Video on WRTC:
These stocks should be positioned sized small relative to portfolio values because the companies often need to invest heavily at a loss. They constantly need to issue stock for funding their expansion and based on history things take longer to develop than investors expect. These stocks are usually overpriced early as investors discover the opportunity. Fluctuations of 50% or more is normal per year. The key is to sell a portion when news is great and buy back shares when news is poor and the price is low.
Finally the greatest opportunities for outsized gains come from high alpha stocks out of favor and new issue stocks that have exploded higher when they first trade and then pullback and consolidate when the new shareholders are taking profits. This is happening every week lately.
There is a price to pay for taking less risk than the market. Generally the price is that at times you will underperform when markets quickly rise. You will hold high cash values overnight. When the markets open higher on news you will have low participation. You will not win on more than 50% of your trades because of risk protection. Your account drawdowns may be limited to 10% or so as compared to a growth account that has drawdowns of 50% or more. You should do far better when the markets go down substantially. You should outperform in a part of a portfolio when gold, silver or oil really moves a lot. You should outperform the market significantly when a high alpha postion really takes off on the upside.
Patience is key just like buying stocks that are 90% off their highs and consolidating require a lot of patience. I believe the major opportunities come to the prepared investor when big change occurs. If capital is protected, I believe big opportunity will come and return can be many times the amount earned by traditional investors. I have found that buying pull backs requires the investor to tolerate a lot of bumps in the road thus buying partial amounts makes sense. When stocks in demand make new highs the winners move extremely fast. The investors then need to trim their holdings and use a trailing stop to keep from giving back the initial profit. When the stock pulls back to a higher low it is okay to add to the position but the stock should not be held if it declines below the previous low.
In summary ACI offers services that are designed for an overpriced high risk market. Tight risk controls are employed as well as the opportunity to benefit from oversized returns on high alpha stocks and new issues. A real opportunity exists to benefit from the next major market decline as well as an opportunity to benefit from counter cyclical opportunities like silver, gold and oil, both long and short. The opportunity to gain in today’s market is present using index ETF’s long and short to benefit if the markets continue to act as they are today before a major decline. To use all of our tools clients need to be suitable, experienced and have a margin account not for leverage but to avoid having to wait for settlement to make a new trade and to be able to sell on the same day as a purchase when a stock doesn’t rise as expected. IRA accounts are best and $100,000 or greater account size is helpful.
Of course past performance is no guaranty of future results. Risk is a necessary part of investing and ETF’s have their own risks. For more information see our disclosure documents and ask for a prospectus to learn about specific ETF’s and their risk disclosures.
AI is proving a successful tool in the money management business.
Artificial neural networks can absorb massive amounts of data, think faster and learn from subtle changes faster than a human can.
Large companies have invested vast sums in AI to help them dominate their target markets.
You have seen IBM’s ad showing its artificial intelligence system named Watson. Amazon is using artificial intelligence to dominate consumer markets. Salesforce.com uses AI to help its clients dominate competition.
The Renaissance Medallion Fund has achieved a new level of dominance and success reported by Bloomberg but it is no longer available to outside investors.
Bridgewater Associates, LLC long known as an asset allocator managed the top performing hedge fund in 2018. Guess what? This manager is much more sophisticated than one would consider an asset allocator to be. AI is a core contributor to Bridgewater’s incredible success.
As an advisor without 300 PhD’s constantly working to build the ultimate AI system like the Renaissance Medallion Fund what can you do to compete?
Thankfully, you do not have to compete directly with these two great managers. The bulk of your competition are much less sophisticated in terms of AI.
Also, you do not have to invest tens or hundreds of millions of dollars to successfully implement AI into your practice.
Trade-Ideas, LLC is the only commercially available AI service that has delivered positive Alpha over the past three years and even smaller advisors can afford the subscription.
Trade-Ideas has recently been awarded Best Machine Learning Development at FundIntelligence’s 2019 Technology and WSL Awards.
Investors, advisors, traders and hedge fund managers are becoming aware of Trade-Ideas, LLC which ranks number 3,012 on the 2018 INC 5000 with three year sales growth of 134%.
Recently, Trade-Ideas has implemented a specialized service for advisors only, named Trade-Ideas Wealth for Professionals. This service offers access to the Trade-Ideas AI System called “Holly” together with tested algos available daily plus the ability to custom design and test algos designed to fit your specifications.
Implementation requires training and some hand holding. This new service provides elements of both.
Trade-Ideas Wealth for Professionals offers:
- Professional portfolio analysis
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Trade-Ideas, LLC services are designed to produce positive alpha for you and your clients, but in addition this power allows you to differentiate your firm from your competition.
This new service is useful for both large and small advisors, but small advisors can be very nimble and can execute risk management in a way that larger advisors may not be able to do as well. All advisors can find emerging industry sectors and high alpha stocks more rapidly using Trade-Ideas. Trade-Ideas professional value proposition is: “We seek to deliver for market professionals consistent, non random, opportunities to capture alpha.”
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Analysts are focused on earning prospects and generally earning prospects appear favorable.
Stock prices however do not look favorable. We believe the power of the up trending market has ended. American stock market indices have produced a double top and recently have broken their 200 day moving averages. 60% of the stocks in the NASDAQ composite are in downtrends. A narrow group of stocks made new highs when the indexes hit their highs. History shows that stocks peak a year to a year and a half before earnings peak when a major top occurs.
To confuse matters identifying the trend only does not lead to effective results for a money manager.
We have been in pop and drop market environment for some time now. Even the great stocks have a powerful rise and then drop. The reverse is true also, a fast decline has led to a fast up move.
Leadership of the most powerful stocks will likely continue to make new highs as laggard stocks make new lows. Managing risk will become more difficult. Perhaps active managers will have their day in the sun. Just like in the 1970’s the nifty fifty stocks will out perform until most of the rest of the stock market has found its value.
Governments have been more active in attempting to stabilize markets and over the past ten or more years have been relatively successful. This type of activity aids in creating higher than normal and eventually unsustainable values. When the rate of change of a stock or index reaches extremely high values the asset price cannot be sustained. Just like an airplane stalls at a high angle of attack, only a foolish pilot would expect to continue to climb at the same angle.
Inflation, although not a major issue today, will in fact be one of the major issues of our future. In the past when this occurs stock valuations have become restrained. Certainly stock valuations would be much lower than today. This issue will lead to a strain on our consumers and on Government. Socialism may be an emerging force today, but in an inflationary environment it might be unstoppable.
What tact should we take? One example for us all has been Bridgewater Associates, LLC long known as an asset allocator. They managed the top performing hedge fund in 2018. Guess what? This manager is much more sophisticated than one would consider an asset allocator to be. Artificial Intelligence (AI) is a core contributor to Bridgewater’s success.
Risk management has always been a necessary part of money management, but a bull market hides a great many sins.
Advisor’s without a clear plan for risk control will not be successful in the years ahead. When the stock market has risen consistently it is difficult for a money manager to differentiate the firm’s track record from other large diversified portfolios and indexes. Thus the constant pressure to reduce fees.
In a declining market a manager with excellent risk management techniques and a focused portfolio stands out. The reverse of this is that a manager without risk management in place may expect a great deal of litigation costs in the years ahead as well as an intense migration of funds out of the firm. c
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