Following the Lead of Martin Zweig

  • Posted by
  • on March 9th, 2013

“I measure what’s going on and adapt to it. I try to get my ego out of the way. The market is smarter than I am so I bend.” Dr. Martin Zweig

I’m a few weeks late with a tribute but I post when I find time to post, and well, that’s today. I have been taking 10-15 minutes each day before sunrise to read his classic Winning on Wall Street, and can assure you it stands the test of time. I am a grateful student of his work, and thought I’d share his influence on my daily routine.

I was immediately drawn to his work, both for its humility and its objective and incremental nature. Reading it in my early 20s, I was too cocky to think about incorporating its message. But its themes of quantifying market breadth, central bank money flows, and investor sentiment stuck with me long enough to adopt its tenets.

More specifically, the logic behind the 4% Indicator became one of the measures I track throughout each and every market day. He rightly credited his friend and colleague Ned Davis with the idea, but thought it worthy of pages 93-104 of his book. I then saw Nelson Freeburg, who I consider the “tester’s tester”, put it through his harsh microscope. He determined that not only did following the direction of the most recent 4% move in the Value Line Composite Index work out of sample, but using any number between 1% and 8% easily beat buy and hold across all metrics. Robust, right?

Interested in combining this with my desire to track market breadth, I began applying this with a few twists. First, I wanted to standardize this across assets; in the PC age that is easily achieved using Average True Range instead of 4%. Second, I wanted incremental signals rather than an all-in or all-out; why not track this for a number of key stocks and let the resulting set of signals guide my allocation range? Finally, I wanted diversification of time frame to capture the most dominant signals between the often-conflicting short, intermediate, and long term.

So now I keep track of the % of stocks on a Buy signal, and measure a fast, moderate, and slow across time frames of days, weeks, and months. Nine outputs that reveal how supply and demand is expanding and contracting under the surface, one-fifth of my lens into market structure. My way has been pieced together, you may find more applicable methods using Bullish % or some use of Vervoot. What matters most is the a) consistency of process, b) dedication to keep the data and, most importantly, c) discipline to act on its signals.

Climate.Mar8

Using this approach(2nd of 4 above), there is just no way to stay on the wrong side of a prevailing trend. Yes, the short-term version of this can get jumpy(and has in recent weeks), warranting more caution than the early part of 2013. It hasn’t said “Bear”, just “Less Bull”. Until I see more stocks join the dark side and stay there, I can’t worry about a devastating $SPX correction…it will show up in the numbers.

My own filter for taking the time to read something is “Is there a repeatable process here?” I don’t know about the consumption of others, but my incoming stream is full of wonderful insight, and inspires me towards more effective and efficient ways of capturing my daily research needs. And every now and then, a good laugh to offset what is a very repetitive daily routine.

I would drive myself nuts extrapolating each macro data point, not to mention central bank intentions and geopolitical narrative. Thanks to Dr. Zweig for directing me towards an objective and measured approach to money management; it has absolutely saved me from myself.

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.

blog comments powered by Disqus
Derek Hernquest Blog