Market Posture & the Prime Directive
Housekeeping Upcoming programming April 9 th meeting; Dave Forster - Candlesticks • Past programming recordings and supporting files http://www.meetup.com/Chicago-NW-Burbs-Trading-Club/files/ Meetup archives Hedging Tactics, January 10th • Susan Carlson’s presentation, chart package • Ichimoku Backgrounder eBook • CALL group annual dues $10/ guest $5 donation • New member forms/ Sign in sheets • 2
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Outline Prime Directive • Why a system? • Objective, subjective, & judgement • Resources • Market Timing/ Market Posture systems • Position sizing • Trend strength • Hedge risk levels • Strategy opinions • Warning types broken out • Sector and rotation analysis • 5
Market Posture and the Prime Directive "The Prime Directive is not just a set of rules. It is a philosophy, and a very correct one. History has proven again and again that whenever mankind interferes with a less developed civilization, no matter how well intentioned that interference may be, the results are invariably disastrous." — Jean-Luc Picard, Symbiosis 6
Market Posture and the Prime Directive For investors and traders – First and foremost that all investing and trading strategies start with an alignment with the Prime Directive. “To utilize a ‘ Market First ’ principle that all application of capital is in alignment with the current market posture and hedge risk level opinion .” 7
Market Posture and the Prime Directive My opinion is shared daily on the Falcon Global YouTube channel market preview. https://www.youtube.com/c/Falconglobaltraders The objective of the market posture and hedge risk level opinions are to determine whether we are in a bull market, neutral market, and bear market centered on the intermediate term time frame. My investment strategy is always kept in alignment with the current market posture and hedge risk level. System gives “permission” to invest or trade. 8
Market Posture and the Prime Directive These opinions are developed through a very comprehensive analysis that incorporate elements of: Portfolio posture from outside mechanical signal systems • Position sizing opinion • Intermediate term market forecast indicator • Strength of trend for the S&P 500 • Hedge Warning Level opinion • Strategy opinions for Options Income, Covered Calls, Put Selling • Minor studies by category including: Volatility based, Trend based, • and Sentiment Indicators Sector Performance and rotation studies • By gathering a range of inputs of different types we gain perspective on the market that is deeper than any one approach can achieve. 9
Why Develop my Own System Lots of information available (even free) out there – too much. Lots of “opinion” available – needed to distill the facts and separate from the bias, or the sources need to sell or market something. Classic sales technique is to create a problem and then provide the solution. Often emotion driven scare tactics; The market is about to crash! Wanted a market posture system that was broader in scope, and with more depth than what is often found in most resources available to retail investors. 10
Why Develop my Own System As close to institutional quality as I could make it while keeping the daily maintenance load and subscription (my expenses) cost in a supportable level. Wanted to be as close to the facts as possible. Minimize opinion and bias but recognize that judgement and some bias will naturally interplay. Influenced by my bias and needs as a full time investor/ trader with a particular style of investing & trading. 11
Other Support Resources Morning Report – 1 page review of overnight • activity, macroeconomic report schedule Market Condition report – 1 page focused on • volatility environment Monthly Business Cycle review • Daily price guides – day trader tools; support & • resistance levels 16 key markets Relative ranking reports • Dividend Aristocrats o Style (Large Cap Value, Small Cap Growth etc.) o Sectors o Industry Groups o Put selling watch list o Country ETFs o 12
Objective & Subjective Measures Utilize as many OBJECTIVE inputs as possible. • a range of perspectives to give a deeper and more • nuanced perspective as to the current market condition and environment. An anchor on the intermediate term which is my • primary investing and trading time frame. 13
Where does Judgement Come In? After I gather the various objective measures I look for • consensus among what the separate indicator systems are telling me. Roll up the information and ultimately make an “opinion” • based on a judgement call of what the collective information is telling me. Ultimately I feel that the use of a judgement overlay on top • of the objective metrics is stronger than a mechanical alone approach. Synergy; 1+1 = 5 • Ability to ascertain “weighting”; not all indicators are of • equal value. 14
Where does Judgement Come In? Ability to ascertain “weighting”; not all indicators • are of equal value. Ability to bring in outside information that may • pertain to the current market environment. Why is the market under pressure? o Congressional sequestration is a short term and binary pressure point. A business cycle related recession phase has different implications to the market environment. 15
Where does the Information Come From? Result of years worth of reviewing financial resources. • What is truly helpful? Additive or Redundant? • Is it reliable? Respected? Valuable to my understanding? • Is it regularly available? • What does it cost to get to the information? • Expense in both time and $$$ o Ultimately there are many resources assimilated and • assembled to make this report. 16
To the Daily Report Handout Daily Report • Updated daily • Most days minor • change from prior day Watch the flow as new • changes come into play and the rate of change accelerates Value of daily review is • in the sensitivity to change that you will recognize. 17
Daily Report – Favorite Quotes to Set the Perspective “Successful investing is anticipating the anticipations of others” John Maynard Keynes “Most investors will concede that the most difficult part of managing a portfolio of stocks is identifying the formation of a major market top before it is too late” Lowry Research Technical analysis is a windsock, not a crystal ball. 18
Market Timing What “they” tell you … • It is impossible to time the market. What “they” really mean … • It is impossible for you Mr. Retail Trader to time the • market, give your money to us and let us time the market for you after fees. Do you think institutions are timing the market? • If it is impossible wouldn’t daily volume be random or • nearly equally distributed every day? Clearly volume is not random or even close to equally • distributed. Institutions constantly time entries and exits. 19
Daily Report – Mechanical Market Timing Signals 20
Daily Report – Mechanical Market Timing Signals Market Trend Phase opinion 5 market phases • Characteristics and definitions of each phase • Tables near bottom on the report that break down • typical duration, characteristics, market participants, volatility and volume expectations for your separate study. 21
Daily Report – Portfolio Investor Posture Multiple independent, mechanical market timing systems. No or little human judgement is applied to the signal. Three independent systems: IBD (Investors Business Daily) • GMI Index • StockCharts Decision Point Scoreboard • All 3 systems are produced by well respected • sources. Many others available. 22
Daily Report – Portfolio Investor Posture Investors Business Daily William O’Neal and the CANSLIM investor principles IBD current market posture: Confirmed Uptrend – 100% • Market Under Pressure – 50% • Market in Correction – 0% • Mechanical plus daily input • Breadth Score • NASDAQ & S&P using o Accumulation/ Distribution 23
Daily Report – Portfolio Investor Posture GMI Index Wishing Well Blog author • College professor who teaches technical analysis. • Avoided every bear market in 40 years. • Issues a graded buy or sell rating. • Mechanical • 24
Daily Report – Portfolio Investor Posture Sideways markets are always a problem for any system Note: IBD Recent Confirmed Uptrends 25
Daily Report – Portfolio Investor Posture StockCharts DecisionPoint Scoreboard Multiple indexes covered • Multiple time frames covered • Mechanical, bullish, neutral, & bearish signals • Look for the stack! Are the time frames similarly • aligned? 26
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