9/7/2016 Give a Man a Buy List Feed Him for a Day New Tools - PDF document

9/7/2016 Give a Man a Buy List … Feed Him for a Day New Tools Destroy Old Rules Teach a Man to Build a Strategy … Feed Him for a Lifetime SumGrowth Strategies, LLC Seattle, WA 1 2 Go- Go 80’s Stock Market 100 % But My IRA Funds Were Flat !! 3 4 Diversify - Rebalance Diversify - Rebalance Own a little bit of These Guys Are All everything ... So you Just a Soap Opera. can achieve precisely Average Performance What’s Up With That? Mass Hypnotism 5 6 1

9/7/2016 Does Recent Market Data Does Recent Market Data 1992 Spreadsheet Experiment: Do Market Data Trends Exist? Hold Clues for Future Prices? Hold Clues for Future Prices? Do Price Trends Exist? Yes! Trends Exist. 7 8 Three Sector Funds Desktop Version in Windows – 2004+ 9 10 Trends are Real ... (Markets are Not Efficient) 1. 2. Risk & Return are Not Mutually Exclusive. -- Review -- 3. There's an Optimum Trend Extraction Method. SectorSurfer Strategy: Efficient Market Hypothesis 4. Which Trend is Your Friend? It Really Matters. • You select up to 12 ticker symbols to participate. • Prices already reflect all past publicly available information. • The trend algorithm picks which one to own now. 5. How to Build True Sector Rotation Strategies. • Email trade alerts are sent typically 3-5 times/yr. • One cannot consistently achieve returns in excess of average. 6. Forward-Walk Progressive-Tuning Provides Credibility. • Stock and other asset prices follow a random walk model. 7. Tactical Diversification Addresses Risk in Three Ways. If TRUE, Diversification is Best. 8. Evidence These Methods Work in the Real World. But if Trends are Real, E.M.H. is False. SectorSurfer Online Charts 11 12 2

9/7/2016 Developed by: Edwin Hurst in 1907 Nile River Dam Project Hurst Exponent Water Flow Character H = Slope of Line 13 14 15 16 Profitability of Momentum Strategies: An Evaluation of Alternative Explanations By Narasiman Jegadeesh and Sheridan Titman (2001) Document Link: Momentum in Financial Markets 1.65% / mo. = 21.7% / yr 16.8% Diff. 0.40% / mo. = 4.9% / yr 17 18 Document Link: Profitability of Momentum Strategies 3

9/7/2016 Time Domain Data: Prices & Trends Fund Prices Eugene Fama Kenneth French Univ. of Chicago Dartmouth College Time Domain The case for momentum is now so strong, these two fathers of modern finance, call momentum “the premier market anomaly” that’s “above suspicion.” The Best Trend Price Trends Is Our Friend. 19 20 TRENDS, by definition, are a “Portal to the Future.” 1. Trends are Real ... (Markets are Not Efficient) Where something in the near past ... ... tells us something about the near future. 2. Risk & Return are Not Mutually Exclusive. 3. There's an Optimum Trend Extraction Method. 4. Which Trend is Your Friend? It Really Matters. Trends ARE the crystal --- Review --- 5. How to Build True Sector Rotation Strategies. ball we hope to find. Modern Portfolio Theory 6. Forward-Walk Progressive-Tuning Provides Credibility. 7. Tactical Diversification Addresses Risk in Three Ways. ● One Must Trade Risk for Return. We’re NOT limited by 8. Evidence These Methods Work in the Real World. Average Performance. 21 22 Must I Trade Risk For Return? Must I Trade Risk For Return? SectorSurfer Thinks Otherwise MPT Tenets MPT Tenets w/ Comments • Market Prices are Gaussian Distributed • Market Prices are Gaussian Distributed • Fails to Consider the Tails are Way Too Fat • Rational Investors Trade Risk for Return • Rational Investors Trade Risk for Return • Fails To Consider New Tools Change the Game • Risk is Measured as Standard Deviation of Return • Risk is Measured as Standard Deviation of Return • Fails to Consider Big Returns Aren’t a Bad Thing • Risk is Reduced by Owning Uncorrelated Assets • Risk is Reduced by Owning Uncorrelated Assets • Fails to Consider Temporal Avoidance Strategies • The Efficient Frontier is the Set of Best Portfolios • The Efficient Frontier is the Set of Best Portfolios • Fails to Consider that the Efficient Frontier is an Artifact of Unfortunate Self-Imposed Constraints from Discarding Time Domain Trend Information 23 24 4

9/7/2016 Must I Trade Risk For Return? Must I Trade Risk For Return? SectorSurfer Thinks Otherwise How to Break Through the Efficient Frontier Can you help a disabled investor? I lost my Time Domain leg and I don’t know what to do next! MPT Tenets w/ Comments Portfolio • Market Prices are Gaussian Distributed • Fails to Consider the Tails are Way Too Fat • Rational Investors Trade Risk for Return • Fails To Consider New Tools Change the Game Let’s Try MPT • Risk is Measured as Standard Deviation of Return • Fails to Consider Big Returns Aren’t a Bad Thing “Diversify and Rebalance” • Risk is Reduced by Owning Uncorrelated Assets • Fails to Consider Temporal Avoidance Strategies Investment Options • The Efficient Frontier is the Set of Best Portfolios • Fails to Consider that the Efficient Frontier is an Artifact of Unfortunate Self-Imposed Constraints from Discarding Time Domain Trend Information MPT Can’t Pick Anything to Own or Avoid Next Month! 25 26 Uncorrelated Assets Uncorrelated Assets Uncorrelated Risk  1/  N Conclusion: “Diversify and Rebalance” Improves Risk, But NOT Returns. 27 28 Must I Trade Risk For Return? BY OWNING ONLY THE TREND LEADER How to Break Through the Efficient Frontier Portfolio Let’s Try Trends Diversify & Rebalance “Own the Trend Leader” Diversify — Didn’t Get Us There. Rebalance Investment Options Trend Indicators Serial Diversification: Owning many funds, but only one at a time. 29 30 5

9/7/2016 1. Trends are Real ... (Markets are Not Efficient) Market 2. Risk & Return are Not Mutually Exclusive. Noise Makes 3. There's an Optimum Trend Extraction Method. Our Crystal 4. Which Trend is Your Friend? It Really Matters. My Tools for the Job Ball Foggy 5. How to Build True Sector Rotation Strategies. • MSEE Stanford University - 1976 • Photoelectric Sensors & Controls – Book 6. Forward-Walk Progressive-Tuning Provides Credibility. • Inventor - Over 40 US and Foreign Patents 7. Tactical Diversification Addresses Risk in Three Ways. • Electronic Signal Processing Theory Focus 8. Evidence These Methods Work in the Real World. My Career Has Been All About Digging Signals Out of Noise! The Game: Extract Trend Signals From Noisy Data. 31 32 Its All About Reducing Noise to Reveal the Signal • Matched Filter Processing – Filter Shape Basis For a Detailed Technical Description, View the AAII Seminar Vide on the Home Page. • Differential Signal Processing – Common Mode Noise Elimination 33 34 Filtering Common Mode Noise Reveals Trend Differences Opposite Trends Diversification Does Not Justify Consistent Positive Correlation is Common Mode Noise Owning Bad Funds 35 36 6

9/7/2016 It’s not a solo contest. It’s a horse race! Matched Filer Matched Filer Ethernet and USB Signal Processing is Done This Way for Good Reason. 37 38 Profitability of Momentum Strategies: An Evaluation of Alternative Explanations By Narasiman Jegadeesh and Sheridan Titman (2001) Their Choices : 1. Trends are Real ... (Markets are Not Efficient) 1. Trend Algorithm: S.M.A. 2. Risk & Return are Not Mutually Exclusive. 2. Averaging Period: 6 Months 3. There's an Optimum Trend Extraction Method. 3. Periodically Repeat: 6 Months 4. Which Trend is Your Friend? It Really Matters. 5. How to Build True Sector Rotation Strategies. 6. Forward-Walk Progressive-Tuning Provides Credibility. Trend Options are Many As an engineer, I want to turn 7. Tactical Diversification Addresses Risk in Three Ways. Period – Week? Month? Quarter? Year? all of the knobs. 8. Evidence These Methods Work in the Real World. Algorithm – MACD? SMA? EMA? DEMA? I want knobs that go to 11. 39 40 What Happens When We Turn the Knobs? What Happens When We Turn the Knobs? Jegadeesh & Titman 7

9/7/2016 What Happens When We Turn the Knobs? What Happens When We Turn the Knobs? SMA: Simple Moving Average Fidelity Sectors Fidelity Sectors Fidelity Countries Fidelity Countries ETF Sectors Dozen DJ-65 Stocks ETF Sectors Dozen DJ-65 Stocks What Happens When We Turn the Knobs? Month-End Trade for Various Moving Averages Fidelity Sectors Fidelity Countries 1. Trends are Real ... (Markets are Not Efficient) 2. Risk & Return are Not Mutually Exclusive. Serial Diversification Conclusion: 3. There's an Optimum Trend Extraction Method. Sector Rotation – Asset Class Rotation Trend Algorithm and Time Period Matter! 4. Which Trend is Your Friend? It Really Matters. 5. How to Build True Sector Rotation Strategies. ETF Sectors Dozen DJ-65 Stocks 6. Forward-Walk Progressive-Tuning Provides Credibility. Strategy-of-Strategies 7. Tactical Diversification Addresses Risk in Three Ways. 8. Evidence These Methods Work in the Real World. Reduces Risk of Returns Going Flat 46 Market Economic Cycle Cycle Smooth Powerful Ride: • All Pistons Are Firing • No Missing Power Strokes 47 48 8

9/7/2016 • Own Only the Trend Leader • No Missing Power Strokes 49 50 Serial Diversification True Sector Rotation – Own One at a Time 51 52 Crowd Sourced - Strategy Design Serial Diversification Stand on the Shoulders of Those Who Have Gone Before. Asset Class Rotation – Own One at a Time 53 54 9