MTA (Market Technicians Association) had an outstanding all
day event on 9/20/14 in Charlotte ,
NC Charlotte ’s
own Carson Dahlberg. I rate the event an
A+. I will do my best to summarize this event but realize I
could not do it justice in this short blog space.
Meb Faber, whose work in “Ivy Portfolio” was outstanding,
kicked off the presentations. Meb’s talk was on “Global Value. How to Spot
Bubbles, Avoid Crashes and Earn Big Returns”. Robert Shiller in his book
“Irrational exuberance”, the term made famous by Alan Greenspan, defines CAPE as Cyclically average inflation-Adjusted Price
Earnings ratio over the last 10 years. Meb says “Valuation is all about
avoiding buying the expensive as well as buying the cheap. Through Cambria funds Meb puts his money where his mouth is… and
invests using the notion that where the blood is also offers the real
opportunity to make good returns.
Blood CAPE <7 1 yr return 31 % 3yr return 18 % 5yr return 21 %
Bubble CAPE>45 1
yr return -9 % 3yr return -4 % 5yr return
-1 %
Using CAPE values for various countries, the best investing
opportunities are Greece , Russia , Ireland ,
Hungary , Argentina and the worst places for investment are
with the highest CAPE such as Malaysia ,
Colombia , Philippines , USA ,
and Indonesia ….
However he notes that the current CAPE for US
is at 26.6, and that there is still room for higher valuations and growth.
How do you identify a Bubble? “When my Mom e-mails me….” And
then Meb gets serious and says CAPE of 5
close your eyes and put your money in, CAPE of 30 consider a Yellow flashing
light and 40 as Red.
Perry Kaufman spoke about “Risk Management using a Relative
Value Arbitrage Trading Strategy” and describes this as one of the 3 trading
strategies he uses to trade his own money. Perry noted that “it is more
important to trade diversified strategies than markets”. He also uses a trend
following strategy as used by 60+% of funds and also a pattern recognition
strategy. Arbitrage – buy the cheap and sell the more expensive stock, fund or
similar market involves finding two stocks or ETF’s that have a correlation
between 0.3 to 0.8, and use a ratio of the two to find overbought and oversold
levels. Stocks such as Ford/GM or Amazon/Wal-Mart are examples. He uses
stochastics and an indicator referred to as Stress indicator to determine Oversold
OS or Overbought OB. Oversold means price has dropped over the last period of
time. Ford is OS relative to GM when the Stress indicator is below 10. We use
this as an entry to buy F. Exit when stress indicator greater than 50 as it is
neutral then.
He mentioned his book “Alpha Trading” and how he took the
concepts further. I have known of Perry since I had a copy of his adaptive
moving average indicator many years back and highly respect his work. I
certainly feel I cannot do justice to him in this short blog but was intrigued
by his arbitrage method. He mentioned how the market is biased towards the
upside, and that the hedge usually loses money. Still, he likes to place a
hedge when the market trends down cutting his losses by half. He admits to
losing money in bear markets as it is very difficult to make money shorting.
Perry says “I hate stop losses” as they fight the system.
Trend following systems require one or two large big moves to make all the
money and with stop losses that can be taken away. He uses a 15% price stop
from point of entry just as an emergency.
My own past work using Metastock and back testing many
stocks and systems shows that stop losses degrade performance and that only
very wide stop losses are of any use. I think Perry is right on.
He mentioned arbitraging stocks such as AMZN against QQQ. He
would only take the long side of the AMZN trade based on the low OS value of
the stress indicator; and add the hedge only if the trend is downwards.
Otherwise he bets on the fact that markets are biased towards the long side. He
determines his trend based on 30, 60 and 120 day moving averages. He typically
likes to place a 1/6 hedge when price drops below each of these moving
averages.
More information on relative value arbitrage can be found
at
Mathew Verdouw’s talk on “Portfolio Optimization using
Relative Rotation Graphs RRG’s” was the last presentation of the day and
certainly equally interesting. The power of RRG’s is in normalization. RRG was
developed by Julius de Kempenaer. Using 4 quadrants one could take the various
sectors of the S&P and see if each sector is in which quadrant - leading,
weakening, lagging or improving. Looking at the quadrant and finding sectors
that have a hook and are moving from a lower lagging or weakening quadrant to
the higher improving and leading quadrants gives us which sectors we should
focus on. Then we can pick the stocks in that sector using the same RRG
methodology and determine the largest opportunity.
Following Meb and Perry’s logic; Mathew points out that the
better opportunities are with stocks that have pulled back to the lower
quadrants. RRG gives a great visual tool to see the behavior of the stock and
when to get in.
A quick Yahoo search on my smart phone yielded that you can
get RRG’s from Bloomberg, Stockcharts.com and certainly also from Mathew at
http://www.mav7.com/relative-rotation-graphs/?cname=RRG
Mathew has moved from Australia
to Charlotte , NC
By the way my SPY chart finally popped in a buy signal… and using my Ivy portfolio ETfs, all are down exception of SPY and VTI Vanguard Total Stock Index.
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