Notes on Vector Vest Strategies

***Disclaimer: These notes are for personal use only

Signs for Selling Shares
1. Increase volume, lower highs, lower lows 
2. P < 40 day Moving average 
3. RT < 1.0
4. Sell rating 

Good stocks for Retirement
RS >= 1.25     - safe stocks, more predictable, less risk, based on fundamental ratios, eg debt to equity.
YSG >= 1.00   - stability of dividends, assurance that dividends will be as good in the future. Shows that company is confident in increasing its future earnings.
CI >= 1.25   - from looking at price history, where the price is increasing consistently.
Sort by VST desc,

Combination for buying stocks in a bear market
RT Kicker Combo / SP500 Ascending
Bear Market Beaters  / Marathon
Gain Loss of 50/10
The key is the Marathon search which is used during a bear market, by people who still want to buy stocks in bear market period.

High VST newcomers
This search aims to catch stocks which have recently reached significant levels in their VST ratings. The original search looks for trends with the last two periods having VST <1.40 and VST > 1.40 respectively. This indicates the VST value has increased the 1.40 levels.

Stocks based on Top Industry
Overall Market -> Sector -> Industry -> Stock
- Use RT as a measure of top Industry
- Within the Industry, we still choose Stocks using VST as the measure.
- In Top Industry, most stocks should be performing well, ie more Buy Recommended.

How to use Industry Ranking
This is about finding stocks in Industry, where the Industry RT ranking is improving, ie Rank becomes better.
'Stocks Industry Group' = 'Top Delta Industries' -> 'Highest 10 by 10 Day RT Delta'

Buy and Hold Strategy - Pros and Cons

The so called buy and hold strategy has been popular for amatuer investors or those looking to park some money into the stock market believing that in the long run, they will have greater return on their investments than other asset classes such as property, government bonds or term deposits. There are various indications that show that this is in fact a failed strategy as investors who adopt this will be worse off.

Here is a list of arguments both for and against the Buy and Hold Strategy summarized from the book by Leslie N. Masonson

Buy--DON'T Hold: Investing with ETFs Using Relative Strength to Increase Returns with Less Risk

For:
1. Stocks perform better over the long run compared to bonds, treasury bills, cash and is the only way to beat inflation.
2. A diversified portfolio of stock, bonds, mutual funds will provide positive return over the long term.
3. It is better to stay in the market all the time since no one can predict up or down.
4.Stock market always recover and go to new highs, so it is better to be patient and stay with it.
5. If investors miss the best rallies, they will miss out on the best returns so it is better to stay invested in the market.
6.Picking high and low points to sell and buy does not work, so might as well stay invested and also to avoid frequent buy or sell commissions.
7.Only commission is the initial purchase so better to be invested for the long term.
8.Buying no load active and / or passive funds does not incur commission.
9. Rebalancing a portfolio annually to achieve a certain stocks to bonds ratio yearly is good. There are no tax consequences if this is for retirement account (for US holders?).
10. Tax only need to be paid when stocks are sold. For the case of mutual funds, they do pass on capital gains yearly and investors need to pay some tax on this. This is more relaxed for retirement accounts. (for US holders?).


Against:
1. Sometimes may take up to 20 years to break even since there is usually bear market in this time frame. Historically some 20 year period may return negative after inflation is accounted for.
2. Exposed to bear markets and crashes. If you just buy and hold, you will lose what you have gained and need to wait for the recovery.
3. From 1998 to 2009, buy and hold strategy did not return positive return after inflation is accounted for.
4. Diversification may not help as some bear market or crashes affect all industries.
5. There is no defense in a bear market. Buy and hold is only effective during a bull market.
6. Missing out on strong market rallies is not as bad as avoiding the worst daily, weekly drops in the market. Movement of prices in a crash is much more severe than in a charging bull market.
7. Commissions on buying and selling stocks have dropped. ETFs in particular allow exposure to diversified set of stocks.

Technical Analysis (Gann Charts) - Dow and All Ords Stumble

Source: http://ozstock.blogspot.com

Here is the next monthly update on the Dow and All Ords using Gann angles to analyse future trend. Before looking into the charts, a quick check of the Seasonal Time Periods from Gann shows that we are nowhere close to any important dates. We are now between the August 5th and the September 22 dates (see future blog for complete Seasonal Time Periods)

Firstly, looking at the All Ords, the last 4 weeks has clearly broken the Gann +1/2 angle, question is if it will drop down. The past 4 weeks have also convincing broken the Gann -32 downtrend line and has pushed the 20 day moving average envelope to the limits. So this has been a strong trend that may retrace back to the Gann +1/2 but currently there is no evidence to suggest a stronger, longer pullback although the news seem to suddenly turn negative in the media.



Secondly, the Dow show a similar behaviour, in the past 4 weeks, it convincingly broke the Gann -10 downtrend angle. It may still plunge towards the intersection of the Gann -10 and Gann +10 angles but there is no current evidence to support this. It is also between the two major uptrend Gann angle of Gann +10, Gann +20. Should the upward trend continue, the Gann -5 downtrend angle may be a good reference to look for.



This week will see many Australian companies release their annual results. This will truly test the sentiment and so even though the trend is strongly upward over the last 4 weeks, the fundamentals may have a say this week.

Technical Analysis (Gann Charts) - Dow and All Ords refuses to fall

Source: http://ozstock.blogspot.com

About a month ago, my article (in June) was titled "All Ords headed for June fall?" As you may have guessed, I am bearish, and in the market following my own advice last month. The market actually dropped for a few weeks as forecasted by previous blog, but my mistake was not using a stop loss. Over the last week the market surged strongly. Let's have a look at what the Gann angles say.



Looking at the All Ords graph first, I've added a new (Green line) angle of ratio 32:1 downwards from the 2007 all time high. The angle gradient of 32 is a power of 2, and I've tried others like 16:1, 8:1 and they were quite far off so I settled on 32:1. But see how it turn out to be a resistance angle to the previous rallies since Oct 2007?

Looking closely, it turns out the June fall hugged the 32:1 angle closely and the recent surge broke the resistance emphatically. In absolute terms, the rise is quite small, but the fact that it broke the line warrants further watch, or even good reason to speculate of further rise.




It's only now after the new green line (32:1) has been added to the All Ords, that I realize the Dow Jones chart's pink line marks out a very similar trend. In the Dow Jones chart, the June fall and mid-July rise follow the same pattern along the Gann -10 line as the All Ords. The resistance is not only broken but appears prominently on the up side.

In summary, if the current rise in the market can be sustain for at least two weeks, there is a good case for a strong rally in this bear market.

List of Blue Chip Companies - Argo Investments

The purpose of this article is to show a list of blue chip companies being invested by Investment Companies - in this case - Argo Investments.

Picking blue chip companies are easy or hard depending on who you are. If you are new to the market, the fact that there are over a thousand companies in the Australian sharemarket makes it a daunting task to even start analysing. Why not look at what the experts are investing.

Currently, the bear market is over a year old - and most people recognised this is going to be one of the worst economic downturns in history. Yet in terms of the sharemarket, clever investors are preparing to dive back in any time now, waiting for the signal that the market has bottomed. Even when the share market starts picking up again, the economy will be in the middle of a great struggle. Companies that are able to survive will be the blue chip companies that keep on producing and coming out of the recession strongly. So that is why we are focussing on blue chips.

Argo investments have been around for more than a decade. While I have not done a thorough analysis, it has done relatively well in the six months to 31 Dec 2008. I present here the list of principal investments of Argo Investments as a guide and starting point for picking blue chip companies.

BHP Billiton Ltd. 12.78%
Westpac Banking Corporation 8.81%
Telstra Corporation Ltd. 7.10%
Macquarie Group Ltd. 6.78%
Milton Corporation Ltd. 6.68%
Woolworths Ltd. 6.09%
National Australia Bank Ltd. 5.90%
Australian United Investment Company Ltd. 5.30%
Origin Energy Ltd. 5.18%
QBE Insurance Group Ltd. 4.51%
Australia and New Zealand Banking Group Ltd. 4.32%
Wesfarmers Ltd. 4.10%
Commonwealth Bank of Australia 3.77%
Rio Tinto Ltd. 3.54%
Woodside Petroleum Ltd. 3.07%
Westfield Group 2.75%
Foster’s Group Ltd. 2.44%
Santos Ltd. 2.37%
AMP Ltd. 2.29%
AGL Energy Ltd. 2.22%

Technical Analysis - Gann weekly 12Jan09 on Dow Jones and All Ords

Following from my post in early January in which both the Dow Jones (DJIA) and Australian All Ordinaries (XAO) were sitting on turning points, recent movement may confirm a break in the trend.

The Dow seemed to have broken the support angle Gann20 coming from the bottom. If so it may be heading down to another support line, perhaps Gann10 from the bottom (which is not plotted yet). It may also find support at the downward angle Gann10 (yellow line). Both of these support are a long way off, suggesting we may have a large drop to go.



The All Ords, since late November, has actually went down, touched the Gann2.3 (pink) support but has bounced up since Christmas. Although it does not seem to have broken the support at this point, rather it is still close to the support angle and thus waiting for the next break-out, we should consider what's happening in the US. If so, the recent break downwards in the Dow, would suggest the All Ords is most likely to break the Gann support and head further downwards.

Technical Analysis - Gann Angles on the current Dow Jones Industrial Index DJI

This is an interesting week. Not only is the American market set to respond to a major stimulus package, but the Gann angles show that we may be at the cross roads. Before analysing the current DJI graph, please note the following technical details:

- The chart below is a weekly chart. Daily chart are too volatile, monthly is good for a longer term view.
- Gann love the 45 degree angle. But that was possible only because the weekly time scale is comparable to the price time scale of certain stocks in Gann's time. Eg. it is reasonable for a stock to move one unit over one week.
- My adopted Gann angle will be a gradient of 10 for the DJI. i.e. 10x1 gradient correspond to Gann's 45 degree. In fact, I will be using gradient terminology rather than degrees.
- The purple line starts from the Origin or Zero, at a particular significant time, eg on the date of the highest point.
- Unlike other charting techniques which simply "connect the dot" from peak to peak or trough to trough, Gann's methods are based on fixed angles or gradients. Gann's lines DO NOT aim to the fit graph, rather the graphs can be predicted by Gann's lines.

(The technical notes above should also be applied to my previous article on Gann)





So the BIG question, "ARE WE THERE YET"? Have we reached the bottom?

1. Usually a bear market has about 3 or 4 drops. But note the 1929-32 had a first big drop followed by 6 other drops for over 2.5 years. In the Credit Crunch of 2007-08 (hopefully not -09 as well) there have been 3 significant drop followed by a huge drop in late September 2008 (the fourth one). The bear may be over ???

2. It certainly crossed the major -10x1 gradient but not really near the -20x1 gradient to find support. So it can drop to that level next.

3. The 20x1 gradient starting from a value of 0 at the date when DJI was highest ever, is acting as a support from the bottom. More interestingly, it looks like it is squeezed upwards by the -10x1 line. It may bull towards 9500 on 27 Jan 2009. Or if it breaks below 8500 this week, it may crash further.

4. Looking purely with time, it is 60 weeks since the major high. To square the time and price, anticipate the DJI to move down 6000 points from 14200, which is about 8200 within this week.


So the final answer is All of the Above; ie. monitor the signals mentioned above. To put it simply, if it does not follow the purple line up, then it will drop further.
It is very interesting that it rests so nicely on the 20x1 line from "O".

Lightning Analysis - AVE - AEVUM Limited

Following huge volatility in the sharemarket over recent weeks, it is now time to look at commercial / industrial stocks, while always keeping an ear open in the biotech space. The reason is not of fear and panic of the market, but simply a recognition that there may be undervalued stocks out there. Note that, Warren Buffet's Berkshire Hathaway just invested US$3bil in GE preferred shares. This follows a US$5bil investment into Goldman Sachs 2 weeks ago.

Hence it is time to go hunting.....

One local aussie stock that look stable due to its nature of business is Aevum Limited (AVE). AVE is in the business of managing retirement villages. One would expect a steady income stream unaffected by the current market turmoil. The rationale is the AVE's clients would have saved up for their retirement and they would tend to belong to the higher than middle income group, thus able to support themselves.

Having selected the industry and company, next step is to dive into the financial statements (see its 2008 Annual Report) ...

The first focus is DEBT. AVE has long term debt of $80m; which appeared to be taken on during 2007-08, having repaid previous debt. This compares to cash of $17.5m, receipts of about $21m and total assets of over $809m. A large portion of assets comprise of investment properties at $790m, and little intangibles. On the surface this appears good, in terms of the relative size of the debt to hard assets, as well as the ability to service its loans.

The next thing to look at is the cash flows. Over the last 2 financial years, AVE has made significant acquisitions - $118m in 2006-07 and $52m in 2007-08. While this is not necessarily bad, there should be caution on companies that tries to grow too fast too quickly, especially in such a bear market, with worldwide recession looming.

Also from the operating cashflow, the net operating cashflow, although positive $20m, is made up of other quantities such as resident loans and bonds. The receipts from residents and subsidies are only $21m compared to payments to suppliers and employees of $31m. These two quantities should be considered the basis of the business and the outflow in this case is more than inflow.

The above discovery leads to a more careful look at the profit statement. Overall, the profit is $28.5m, compared to $22.9m the previous year. Looking at the details again, out of the $60m gross income, only $24.7m is from revenue, the remainder is due to revaluation of property. This compares with an expense of $28.4m. The question is, without going to the actual sites nor knowledge of the real market price, can we believe that the properties can be revalued to an extra $35m? Clearly without the revaluation, there would be a net loss.

The summary is that AVE looks to be a business that would be stable in a frightening bear market. But open closer inspection of the financials of the company, the real amount of money made from the business does not look too promising.

Ten simple rules to avoid large trading losses (with CDFs)

This article is published by CommSec and is intended for CFDs. However the techniques seem to be quite useful for other derivatives and even trading stocks directly.

"Avoiding the commitment to failure

In theory, when a trader experiences a decline in the value of an investment the desire should be to exit the position. But often the opposite occurs. A behavioural concept known as ‘escalating commitment to a chosen course of action’ can be the downfall of a trader, especially when using a leveraged product such as contracts for difference.

Forced compliance studies induced individuals to perform unpleasant or dissatisfying acts in the 2003 text The Social Psychology of Organizational Behaviour, edited by Leigh Thompson. Because the individual could not undo the consequences of the act, it was found that the individual biased his attitude towards
the experimental task so as to reduce any negative outcomes resulting from the behaviour. By justifying prior behaviour the decision maker increased his commitment in the face of negative consequences and the higher level of commitment in turn led to further negative consequences.

Probably the most famous example of escalating commitment to a chosen course of action was the Vietnam War. In a 1965 memo from former Under Secretary of State George Ball to US President Lyndon Johnson, Ball wrote “Once we suffer large casualties we will have started a well-nigh irreversible process.
Our involvement will be so great that we cannot - without national humiliation – stop short of achieving our complete objectives.”

In the trading world, once a trade turns bad a trader can rationalise his bad decision and increase his commitment by either staying in the position as losses grow or by adding to the position in what is commonly known (with long positions) as averaging down.

When a losing trade is not exited quickly, because of the leverage factor, losses can mount exponentially. Nick Leeson’s futures trading in Singapore in the 1990s was an example of an escalating commitment to a chosen course of action in a leveraged product. But small private traders managing less spectacular
amounts of capital should also be aware of the phenomenon because it is not uncommon for small traders to end their trading career with a single catastrophic trading loss.

Some simple rules can help you to avoid the big loss and stay disciplined:

1. Trading is a 50-50 prospect. A trader can win less than 50% of the time and still be profitable. Success or failure is not due to the amount of winners you pick but rather the dollar return on winning trades versus losing trades. In other words, be consistent with your risk amount and stop losses and aim to make your wining trades larger than your average losing trade.

2. Markets don’t behave rationally therefore sticking to a losing trade can never be rationalised. Prepare mentally and financially for both scenarios before you enter the trade - winning and losing - by placing stop loss orders and identifying possible price points where the trend may become exhausted.

3. A study of multiple choice examination habits has shown that going back and changing answers increases the chance of being wrong. Never move a stop loss level once it is set, unless it is in the direction of the trend you are trading.

4. Moving a stop loss order with the trend will help you maximise profits because you are changing your exit level in accordance with the market direction. Some experts advocate never exiting a trade unless it’s on a stop loss order – any other approach is effectively picking a top (or bottom).

5. Always aim to place a break-even stop-loss order after your initial stop loss order. A break-even stop is a free ride. No one ever went broke from not taking losses.

6. Choosing not to trade can be more difficult than taking a trade. When there are no good trading opportunities it’s best to sit on the sidelines.

7. In a bull market your goal is to make money from the upside and in a bear market your goal is to make money from the downside. In other words, it’s smarter to look for short trades in a bear market.

8. The middle of the trend is the “meat in the sandwich”; the beginning and the end of a move are inconsequential. If you want to be profitable only trade the middle of the trend.

9. The bull market for stocks has created a bullish bias. Therefore stocks that are breaking down can do so more quickly than rising stocks as the majority of traders exit long positions. Be prepared to act quickly in a falling market.

10. Information such as technical indicators and economic news can be used to justify a losing position. Price is the ultimate arbiter of value. Follow the price. "

As with all other articles on this blog, this article is not considered financial advise, but merely for thought and discussion.