Home stretch, here folks! I saved the questions that might require a bit more “long form” answers for today. For example, I’m going to cover a question by a reader on the potential for a market crash, along with commentary on where I view the market going in the coming year or so. I will also answer a question on the effectiveness of Technical Analysis aka if it allows an investor to outperform indices. That question ties into another one I got from a reader who asks if – given world events, is TA redundant now because “this time is different”. Finally, I’ll have some fun answering a question regarding the “day in the life” of a professional Portfolio Manager vs a retail investor. Lets get ‘er done!
Is another crash coming? Market outlook
Rick notes that I have eluded to the potential for a market crash in the past. for instance, I tied spikes in oil prices to market corrections on this video (well worth watching if you have not). I also tied the potential of a bear market through some Elliott Wave Prognostications on this blog – which is also worth visiting for those interested in my longer termed outlook. Because I have already posted the above video and blog, I will not re-hash my macro big-picture view today. I really do encourage you to visit those links.
However, its worthwhile to take a mid-termed view (weekly charts) at the markets right now. The mid-termed view (view for the coming 3 months to maximum 1 year) will add some insight into the very big-picture work I presented in the video and blog noted above.
To start, I should point out that my next blog will cover the Bear-o-meter compilation reading. This complication tends to give us a decent picture of the risk/reward tradeoff on the markets. Its actually pretty accurate in predicting 1-2 month moves if it moves to an extreme (higher risk, or lower risk relative potential). I didn’t do a full reading today, but before getting to the chart, I did take a quick look at many of the factors in the compilation. As a general observation, I noted that most (not all) of the breadth and sentiment indicators are relatively neutral. More on this later this week. But for now, lets assume that market risk/reward appears fairly balanced – aka no edge to either side.
As for the mid-termed weekly chart – I wanted to extend this one a bit. Here is a chart that I have been notating and presenting on this blog since 2008! I don’t bother presenting momentum studies, etc here. Yes, its a weekly chart, but I am looking for longer termed patterns that affect mid-termed movements. Two main things to observe: First, the tendency for markets to consolidate or fall after the removal of stimulation (monetary or fiscal). I note the withdrawals, and the effects therein, of these programs in red. I note the addition of new stimulation programs in blue. The pattern is obvious. Stimulation = good markets. Withdrawal = corrective markets. On the far right, note that monetary (interest rate) tightening has been announced. Leading into that, markets fell. Coincidence? I think not…..
Next, observe the Big Green Line (“BGL” trendline). It is encouraging to see that the recent correction saw support come in near the trendline. Some market pundits are trying to build a case for a Head & Shoulders top right now. This is like building a case for who’s going to win the big-game (name your sport). Anything can happen. As a TA purist, I do not predict. I do prepare. My original teacher in TA was the great man himself, Ralph Acampora. Ralph, like myself, owns mastiff dogs. So he wins extra kudos for that in my books! Anyhow…A primary lesson he taught the class was to ask not “what it (the market) will do“, but to instead ask “What is it doing?”.
You can’t predict, you can prepare. Sure, we can observe historic patterns like the EWT patterns and the relationships of oil and market crashes as noted above. But in the end, that’s just a notation of history to be aware of. Its more important – as Ralph observes – to identify the current pattern. And since there has been no true neckline break, we cannot call the current pattern a H&S top. Further – since the long termed BGL still stands, we cannot call the current move as the beginning of a bear market.
So, to answer Rick’s question: I am very aware of the dangers of the historic trends (EWT pattern, oil spikes). But, I must assume that the bull market is in place until we get the 3-bar (weekly chart) break, 40 week/200 day SMA break, a lower low on the weekly chart that is not revived (as it was recently), and finally, a break in the “Big Green Line” on my chart.
Hope that helps!!
How effective is Technical Analysis?
Ron asks if TA really does offer an edge. He wants to know if we at ValueTrend are outperforming the markets (indices), and if we are outperforming other (assuming more fundamental analysis driven) managers. In the same light, Peter asks if world events like COVID, China, Russia/Ukraine, Inflation, world trade restrictions, and protectionism make TA and prior market cycles redundant because, effectively, “this time its different”.
Starting with Peter, I want to quote Sir John Templeton, “The four most dangerous words in investing are: This time it’s different.” Peter, please name a time when markets were not facing stressful and even catastrophic events? Markets correct, sometimes go into bear markets, but inevitably revive and move forward. To name in no particular order- just a few major, often horrifying disasters that markets have survived: Nixon impeachment, Recessions, WWI, WWII, Cold war, Great Depression, Russian revolution, Cuban missile crises, 9-11 terrorist act, Vietnam war, Y2K, PHIGs near default, Kennedy Assassination, Sub Prime and bank collapse, Justin Trudeau elected, COVID, Brexit. More to come, I am sure. The old market adage goes:
The market climbs a wall of worry
Technical Analysis is the study of investor behavior. In a nutshell, human beings are hardwired to respond in predictable patterns. Human brains will not evolve past these behavioural patterns for some time to come, which makes the use of trend and sentiment analysis work in any environment. Please read my book Smart Money Dumb Money for a better understanding of this concept. One last quote, from Larry McDonald of Beartraps, who is one of the all time greatest traders in modern times:
“Use your fears to your advantage – do NOT let them control you. Measure the pain in your mind, the more fear you feel, the closer you are to real opportunity”
Now, having said all of that, I’d like to address Ron’s question. Does TA offer an edge, and how have we at ValueTrend done by using it? First, let me point out that, just like in any field, there is a bell curve. I explained how a distribution curve works in this blog (bottom of the blog). Just like with the doctors in that blog’s illustration, there are outliers in every profession. A small minority of people in my field are very, very good at achieving an “edge”. I talk about achieving that edge in my Technical Analysis Course. At the same time, there are a few people in my field who are very, very inaccurate analysts. These are the people who, as described in my market outlook above, see Head & Shoulder formations and act on them with no conclusive confirmation of the formation. They trade without following a properly disciplined approach to entry/exit decisions. Sure, they may hold a CMT or call themselves Technical Analysts. But they are second-string traders and/or portfolio managers. Results talk, BS walks – and a sign of these people is a lack of disclosure insofar as their performance. You don’t see their performance posted online – because they are all talk.
The biggest part of the distribution curve is the middle. About 95% of all performance lies within 2 standard deviations of the middle. So, like doctors, the people in the middle may or may not be operating with an edge for outperformance. Seeing as they are in the middle, I would suspect that they are operating in line with fundamental analysis managers and/or the stock market indices. Not much better, not much worse.
The big question: Ron wants to know if we are in that upper group, who are outperforming the markets, and outperforming other managers? Well, I used to get data sent to me on how we were performing vs a class of managers who somewhat follow our asset allocation breakdown. They were called “Canadian Focused” managers. The problem there was that we are not really in any group, including the Canadian focused group. That’s because we are “true” active managers. As such, we have pretty flexible outlines as to what and where we will buy, along with how long we will hold. We don’t have a mandate to hold “X” Canadian or “Y” commodities or “Z” currency exposure. We simply go with the flow as agnostic managers after “absolute returns”. Ron, if you do not already, please subscribe to our newsletter here. That newsletter is a hybrid of the exclusive information we send out to clients. We are sending out a new issue this week on absolute return investing. It will help.
Here are our gross (pre fee) returns as of March 31, 2022 vs the S&P 500 USD and the TSX 300. You will note that we are beating markets in our platforms across both the longer termed periods (see our performance page here) AND in the year to date numbers during the recent negative markets- below. This, even after fees. Our fees for the VTEP Equity Platform are 1.75% for clients with < $1mm, and 1.5% for clients > $1MM. Its 0.6% for the VTIP Income Model, and our uber-active high volatility VTAG Aggressive strategy charges 2.25% (and we work for that extra fee- check the results!).
As said, Ron, Results talk, BS walks- this should answer your question if our management is effective and worth paying for:
The information contained in this report is for illustration purposes only and was obtained from sources that we believe to be reliable however, we cannot represent that is accurate or complete. The portfolio may invest in leveraged or inverse exchange traded funds and thus there may be exposure to aggressive techniques which may magnify gains and losses and can result in greater volatility and be subject to aggressive investment risk and price volatility risk. All performance data represents past performance and is not necessarily indicative of future performance. ValueTrend Wealth Management’s liability shall only be attached to the accuracy of the information contained in your official statement of account and information in your official statement of account will always take precedence over the information contained in this illustration.
Of note: While ValueTrend’s chief mandate is to offer absolute returns in most market conditions, it doesn’t hurt to see that we have outperformed the markets over the long run, too (see our performance page on the website). The S&P Dow Jones Indices has released its latest SPIVA report card, which sizes up the annual performance of “S&P Indices versus Active” managers (hence the name SPIVA). Some of the findings are startling, like one showing that 79% of active mutual fund managers underperformed the S&P last year. It also revealed that 86% of fund managers even lagged the benchmark index over the past decade.
Its gratifying to know that ValueTrend’s active approach has provided our clients with more consistent and less volatile returns along with long termed outperformance – putting ValueTrend in a very exclusive number of investment managers.
A day in the life of a Portfolio Manager
This was my favorite question, so I saved it ’til last. Francisco asks – what is my day line functioning as a Portfolio Manager vs. non-professional investors?
Francisco, there are many moving parts to my job, but I can broadly categorize what I do on a rolling basis. Here goes:
First, I roll our of bed, and drink a bottle of scotch and smoke a pack of butts while nursing yesterdays hangover. Just joking, just joking!!!! Anyhow, I do roll out of bed, make a cuppa’ java and read the early financial news and futures movements for the markets. When arriving at the office (home or commercial location), I have various tasks that I assign myself for the week.
- I do a weekly review of the charts of all current holdings in the VTEP (Equity Platform) and a bi-weekly review of VTAG (Aggressive Growth Strategy). I’m looking for signs, where appropriate, to add new legs to positions, sell at a target, or sell on a technical signal (profit or loss).
- I also review the macro’s of the market. Markets might be bullish, bearish or neutral. Seasonal’s add into it, but trend and sentiment comes first. I am responsible for decisions regarding cash percentages in the platforms, along with beta and sector rotation. See my TA course for lessons on how I do this.
- Assuming we have cash and conditions have become more bullish, I need ideas on what to buy, and what to sell. If conditions were bearish, we may be in cash and in low beta defensive sectors (for example). I follow the sector rotational process noted in the TA course to come up with new rotational ideas.
- New stock ideas can also come from “bottom up” analysis. At ValueTrend, we buy a few highly effective institutional research services. The amount of reading is rather immense. I spend 2-3 hours every day just reading these reports searching for ideas, trends and stock ideas to examine.
- My macro, sector, and individual stock analysis ultimately gets discussed with Craig. If we need to sell due to macros, what should we sell? If we are to buy, what do we buy? I provide him with lists of stocks out of my sector and bottom-up work. He needs to do his fundamentals on these potential decisions, and then meet with me (phone, zoom or in person, depending on where I am) to confirm what, if, and when we make the moves. Its always a joint decision.
- I should mention that Craig also spends gigantic amounts of time regularly reviewing the fundamentals of our stocks, listening to their management calls, and also reviewing my new candidates. He also reads the most important of our institutional research subscriptions, although he is more focused on the individual names.
- I read and respond to the plethora of business emails, and send the latest “wanna buy a new issue of this venture exchange stock” to junk mail. I forward other emails to staff members if I am not specifically needed to answer the issue. I do own the business, so that’s a separate set of duties that I have to deal with. Everything from government, to compliance, to taxes. Cindy is a massive help in this department. She does a big chunk of this rather un-fun side of the work, helping me to to focus on the portfolio management work.
- Because we are first and foremost focused on portfolio performance, I tend to bury myself in the analytics discussed in the first five points. Craig and Cindy do much of the client service, which allows me to be most effective. But I do participate in some client meetings with Craig, depending if he feels he needs me in the meeting. I am always involved in initial new client meetings to ensure they are fully informed on how ValueTrend works. I do try to be accessible to clients, but they understand that its far more important for me to make the right investment decisions for our Platforms, vs. spend time talking about how much someone could put into their RRSP this year. Remember, results talk, BS walks.
- I write 2 blogs a week and at least one external publication article per week. I do a video and do the VT newsletter (that I mentioned under Ron’s question) periodically. I do a fair amount of that writing after markets are closed.
- I don’t really take vacations. I work pretty much every day of the year. Typically I work in the mornings until about 2 pm, then ride my bike (on a trainer or outside). Some of you are aware of my lifetime passion for bicycle racing and riding. I still train hard, and am even using a coach right now. I race year round, sometimes in Florida. After the ride and into the early evening, I tend to do a lot of the writing mentioned above (blogs, newsletters, media work, videos).
That’s all, folks!
We made it! Yay! Another AMA blog – done-diddly-done! Back with the Bear-o-meter blog next.
So I guess you don’t follow some of Warren buffets advice
If you aren’t thinking about owning a stock for ten years, don’t even think about owning it for ten minutes.” – Warren Buffett
“Our favorite holding period is forever.” – Warren Buffett
“If the job has been correctly done when a common stock is purchased, the time to sell is almost never.” – Phil Fisher
I wrote an article years ago for moneysaver called “You are not Warren Buffett”. People have a view of being able to “do as Warren Buffett does” – problem is, he invests in many non-public companies, he also does alot of off-book private deals, and he does in fact, despite the legend, trade. Don’t know about you Dave, but I don’t have the money to place a call to JPM (as he did in 2008) and say “I’ll bail you out and give you $1BB, and I want you to create some special private convertible preferred shares just for me in return…deal?”