Converting Analysis to Action

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  • on October 8th, 2010

I had the pleasure of attending the MTA Midwest Regional Seminar last week, and there was a point when it struck me how I can be drawn into a presentation.  I’m going to create of mangled phrase here a la #43, but let’s call it “specificity of process”.  It was my “a-ha” moment that also explained what engages me to dig through certain articles and skip others.

In a world of noise, I need something on which I can act.  Not to be confused with an actionable trade that I must execute today, but a practice I can implement over and over again.  I’m not expecting some grand makeover of my process, it is what it is and changes from this point are minor.  But new ways to improve the regularity and efficiency with which I can execute that process?  Yes, indeed!

It is so clear when seeing someone’s work, who’s the theorist and who’s the participant.  I recall a CFA event with a panel including a portfolio manager and a business school professor.  While the professor gave theoretical responses backed by random data points, the portfolio manager was blunt and decisive about how he would make a decision.  Right or wrong, I’ll take the portfolio manager’s take every time because I’m able to peek into his process and watch him translate raw data into actionable information.

If I enter a trade because it “looks cheap” or because of demographics or politics, how will I ever know when to exit?  I think no matter your style or timeframe, Brian Shannon has nailed the questions we should ask when translating our analysis into action:

“Where has it come from?”

“Where does it have the potential to go?”

We all have our own philosophies on what drives supply and demand.  But whether you read balance sheets or stock charts or the tape, shouldn’t the questions above be asked every time before committing money?  Without a clear process for entry and exit, the important questions become difficult to answer.

That said, I’ll shift to my own work in an attempt to improve upon a recent subject.  I had introduced a form of market momentum that I think delivers the regularity and efficiency as demanded above.  While my artwork is still 6th grade at best, I think its implications bear repeating.

How does this graphic help me in a way that other breadth measures can’t?  Because it updates the distribution of 21 day highs and lows, there is a pivoting indication that my other breadth measures just don’t give me.  I’ve always kept detailed stats for “% Above” various moving averages, and found them helpful in identifying divergences, but divergences in a powerful trend are simply consolidations…watching the distribution tells me when I should ignore or acknowledge those divergences.

In late August, we saw a clear breadth pivot…any lookback to that date showed August 25 as the clear date on which the highest number of stocks made their low.  Looking at it today, we see slight erosion but no identifiable pivot/anchor.  I can get the answers I seek from this simple snapshot:

1) There has been no significant erosion of demand indicated by the # of stocks making highs

2) There has been no significant explosion of supply indicated by the # of stocks making lows

3) There has been no significant erosion of demand indicated by a breadth pivot in the rear view mirror

Again, I can only share what works for me, and how I use it to simplify and repeat my process.  The stats will reflect something my instinct will already know, but in the heat of the moment I will have an objective tool ensuring that I shift gears within days of any major reversal.  Not a bad tool to support my efforts in staying on the side of market tailwinds.

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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