Market Brief May 10th 2012

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This Week’s Signal Activity

Currently there is no predominant trend in the broader markets over both short (several days) and mid-term (several weeks) investment horizons.

Sectors to Watch

Energy – While the energy group has been one of the weakest sectors over the past several months certain names are bucking the trend. Cabot Oil and Gas (COG) and Range Resources (RRC) are showing notable relative strength.

Open Positions Report – Note: This is ONLY open positions marked to market, not positions that have closed today or on previous days.

(As of the CLOSE on May 9th, 2012 on SWING MODEL Positions)

Earnings Talk

The following “conversations” regarding Earnings and Guidance on S&P 500 Stocks have been recorded from digital and social sources for upcoming events.

IMPORTANT DISCLOSURES

Titan does not represent that performance information is accurate, complete or current, and Titan has no liability with respect thereto. Past performance does not guarantee future results. Titan strategies are subject to change without notice and Titan has no obligation to update you as to any such changes. The information provided herein comes from what Titan believes to be reliable sources. Titan, however, makes no representations as to its reliability or accuracy, and you should undertake independent analysis to ensure the accuracy of the information. This information is solely for informational purposes and does not constitute an offer to sell or solicitation of an offer to buy securities. Titan is not an investment advisor. Entities including but not limited to Titan, its officers, directors, employees, consultants, customers, agents, and affiliates may have a position, long or short, in the securities referred to herein, and/or other
related securities, and may increase or decrease such position or take a contra position which are subject to change at any time and without notice. Reproduction without written permission is strictly prohibited.

 

Market Brief April 20th 2012

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This Week’s Signal Activity

TickAnalyst algorithms have been picking up both long and short signals in recent days, which is typical of a consolidation or trend reversal in the underlying indexes.  Whether or not the predominant bullish trend re-establishes itself is still a question.

Sector to Watch

A recent and interesting TickAnalyst trend is the outperformance of big Consumer Staples names in recent days.  Hershey’s (HSY), Clorox (CLX), Sara Lee (SLE), and Kimberly Clark (KMB) have all held a consistent bid versus the broader market’s indecision.

Open Positions Report – Note: This is ONLY open positions marked to market, not positions that have closed today or on previous days.

(As of the CLOSE on April 19th, 2012 on SWING MODEL Positions)

Earnings Talk

The following “conversations” regarding Earnings and Guidance on S&P 500 Stocks have been recorded from digital and social sources for upcoming events.

 

IMPORTANT DISCLOSURES

Titan does not represent that performance information is accurate, complete or current, and Titan has no liability with respect thereto. Past performance does not guarantee future results. Titan strategies are subject to change without notice and Titan has no obligation to update you as to any such changes. The information provided herein comes from what Titan believes to be reliable sources. Titan, however, makes no representations as to its reliability or accuracy, and you should undertake independent analysis to ensure the accuracy of the information. This information is solely for informational purposes and does not constitute an offer to sell or solicitation of an offer to buy securities. Titan is not an investment advisor. Entities including but not limited to Titan, its officers, directors, employees, consultants, customers, agents, and affiliates may have a position, long or short, in the securities referred to herein, and/or other
related securities, and may increase or decrease such position or take a contra position which are subject to change at any time and without notice. Reproduction without written permission is strictly prohibited.

 

Expected Value

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How do you decide between two trading systems, or between different combinations of stops and profit targets within a single system? Would you rather trade a system that has a 70% win ratio with the occasional large loss, or a system with a 30% win ratio, many small losers and the occasional home run? Part of the answer lies within your personality; as a trader do you need constant validation or are you happy to sit through a string of losses waiting for the big win?

Beyond the personality traits though, we can look at statistics to help us find the answer. Baseball uses RBI, Slugging Percentage, OBP and Batting Average in much the same way. A player with a high Batting Average and a low home run total is analogous to our 70% system while the 30% system is similar to a player with a lower Batting Average but a high home run total and RBI.

In trading we can use Expected Value in much the same way. Would you rather trade a system with an average profit of 2% on winners and an average loss of 3% on losers which wins 70% of the time, or a system with an average profit of 4% on winners and an average loss of 1% on losers that wins only 30% of the time? Mathematically it makes no difference. For every 100 trades in the first example we should win on 70 for a gross profit of 140 and lose on 30 for a gross loss of 90. The net profit of 50 equates to an Expected Value of 0.5% per trade. The second system should yield 30 winners for a gross profit of 120 and 70 losers for a gross loss of 70, giving the same Expected Value of 0.5% per trade. In this case your choice will come down to your personality, but often different systems will have different Expected Values. A particular advantage is that it allows for comparison between systems with a differing number of trades and test periods.

The Expected Value then is the average result that you expect to achieve on each trade over time. However it shouldn’t be confused with what you will make or lose on any individual trade.

Titan now includes an optional column within its TickAnalyst platform that shows the Expected Value for Intraday ETF signals and all Swing signals. We display one value for Intraday ETF’s as we only stream a Close signal for these. For Swing trades we display two values, the first is calculated to P2 and the second to Close.

A user can extrapolate from these numbers to find Expected Returns over time. For instance with a given account size and trade size it is possible to work out how many trades can be taken a day and what the average month might yield in returns. Again a note of caution is required here, as this will show an average monthly expectation over time rather than what you might make this month or next month.

We believe that this addition to TickAnalyst will assist our users in many ways not least in highlighting the overall value in the platform. A related topic is quantifying risk and sizing trades using the concept of R value and we will address this in a future article.

New Media Killed The Stock Picking Star

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For those of you old enough to remember the launch of MTV in 1981, the first music video broadcast by the network was a relatively obscure song from the Buggles titled “Video Killed the Radio Star”. The lyrics refer to a period of technological change in the 60s & 70s, the desire to remember the past and the disappointment that the current generation would not appreciate the past. Prior to music television, radio was the most important medium through which Rock Stars were created (unless your name was Elvis).

I want my MTVAnd the rest was history as MTV changed how musicians’ ideas and song influences were forced to comply with the “the look” and not the song.  Band members were forced to dress a certain way (I lost track of which Glam Rock band was which) or they would no longer get on the air, and thus no one would buy their records.  The era of the Rock Star was forever changed and bands that refused to assimilate were buried in a pile of broken vinyl.  Shift ahead to 2001 and iTunes enabled anyone with a Mac to record and distribute music without a production company and a few years later the YouTube medium infected the world with Bieber Fever and quite possibly the worst song of all time, “Friday” by some talentless 13 year old kid who probably made her first million ten years faster than Bob Dylan did.

So what the hell does that have to do with trading?  The point is innovation is coming at us faster and faster.  Those who adapt quickly stay in the game.  Those who hang on to the past get tossed to the curb.  The internet has made research and buying and selling stock extremely easy. Despite the speed of online brokerages and the sheer amount of information out there, for most people investing hasn’t gotten easier. The double-edged sword of speed and information has not actually simplified things.  It’s only created information overload which creates a classic case of “paralysis by analysis”.  Pros and amateur traders alike are facing whipsaw market swings which are often driven by a hyper attention to news.

Today’s trader ends up in a hurricane of information – and they become unable to make any sense of it. Try counting how many different websites, articles, videos, reports, exist on the internet today just around a single stock. There are thousands of them.  Now, multiply that by 40 positions and it’s a mess very few traders can keep pace with.  And that paralysis causes traders to complicate their trading. The reason is because that free information is usually either counter-intuitive or contradictory.

The other element facing today’s trader is that free information is riddled with errors, speculation, and a seemingly overabundance of consumer sentiment on almost every aspect of society.  Facebook and Twitter have given a huge megaphone to tens of millions of people who have an awful lot of time on their hands to post comments on everything they buy or every place they frequent.  This all gets compounded by the fact that some companies are hiring posters to boost their image, while stock pumpers/dumpers are trying to recreate the old “Click Fraud” scam by automating chat board posts.

The faster flows of information, coupled with knee jerk reactions to overblown events have put traders in a difficult decision making role.  Investors in the past had a more tolerance for being able to take longer-term positions, which is directly correlated with the slower dissemination of news or lack of access to information.

Here are some tools which traders are currently using to filter the noise and try to get back to trading like rock stars:

Social Media Data Aggregators – The increasing amount of stock related social media data being generated, while debatable whether it has enough force to move liquid stocks, cannot be discounted in its entirety.  Look for companies like Datasift, Gnip and Recorded Future to gain a lot of traction as new unstructured market data providers in the near future.  These tools require seasoned developers and sometimes quants to tailor the data and integrate it into trading strategies.  They all have algorithms built in to detect bogus data as well as add sentiment scoring to determine how valuable the information might be.  Free information costs nothing, but you get what you pay for.

Portfolio Replicators – The concept of copying another funds picks as one’s own is not new for small hedge funds (it accounts for Billions in AUM), but there is a new breed of financial start ups which allow retail investors to subscribe to the moves of some top hedge fund professionals at the fraction of the of typical management minimums and fees.   AlphaClone, Covestor and Ditto Trade are firms to watch in this growing space.  If you can’t beat ‘em, join ’em.

Streaming Research – Alpha capture methodologies come in all shapes and sizes.  But a common premise is the need to scrutinize both historical data patterns and real time market data.  Until the last few years this has been a disjointed two prong approach for non-quants who lacked access to sophisticated and expensive technology tools.  It’s a very tedious search intensive process.  Titan has reversed the paradigm by serving up alpha capture opportunities in a dynamic stream which is aware of both historical and real time conditions simultaneously.  The software incorporates both traditional market data as well as social media data provided by our social media aggregation partners.  The risk profile, model types and symbol sets can all be customized, eliminating a huge amount of noise.

Human – Machine Collaboration

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The TickAnalyst product is designed to stream “soft-pitches” to the end-user’s desktop. All of the heavy lifting/pattern recognition/symbol management is done in our data centers. Traders are meant to have a convenient user-friendly experience that allows them to focus on the markets while having a stream of high quality technical/behavioral/quantitative trade ideas always at the ready. Because the engine is looking at 1400+ stocks concurrently, there are times when a very large number of opens occur nearly all at once.

User Question: How long can an end user get if he is already quite long and TA recommending he get longer still?

Answer: Very long- most likely more than the buying power of most individual traders. This is why we encourage filtering of models and symbol sets to fit the trader’s style and risk parameters. However, many of our clients are portfolio managers who don’t face such restrictions, while others have mandates that have to be obeyed. In general, a few times a year, any given model on the whole symbol universe can spike to well over 100 open positions.

Titan has customers who utilize the trade-stream in a discretionary/grey-box manner. Titan also has customers who utilize the trade-stream in a more systematic manner. However, even in the second case, the customers adjust and filter the information they are receiving so that they do not take too many trades, run out of buying power at just the wrong time, etc. The second group is also typically a fund who utilizes more Portfolio type strategies and who is willing to sit through periods of chop and heat, if need be, recognizing that these periods are interspersed with directional periods. They also often apply their own overlays (such as a fundamental screen).

Ideas on when to use Discretion

While all of our models do show positive expectancy over a range of market cycles, there are still areas where a good discretionary trader can add value. While attempting to add value can be a double-edged sword, our target market is composed of professional traders, and theoretically they can pick times and places in which to add value. We have a number of discretionary end users who do just this –utilizing the trade-stream very actively and aggressively, while also picking and choosing – and ultimately increasing both the win ratio and average win/loss. Again, while an inexperienced or bad trader could just as easily make poor discretionary choices, we see traders using “informed common sense” and industry knowledge to make improved discretionary decisions.

Simply put – we encourage TickAnalyst end users to ALWAYS take the trade idea and apply discretion. Traders should frame the trade-stream in context based on their own experience and based on their own risk tolerance. Some ideas where further discretion might be applied:

Fundamentals – Fundamentally sound stocks can be married with Titan’s technical/quantitative/behavioral triggers to get the best of both.

Event related – Earnings reports, corporate actions, or other “catalyst” type events could lead a trader to make a discretionary choice.
News & Headline risk – We have found Titans identified patterns, while wrong from time to time, are a great method to gauging the market’s directional forces, on balance, over time. This said, it will be wrong at times. If the world changes overnight (geopolitical shocks, etc) – patterns will get shredded.

Correlation – It has been well-covered by the media recently (such as the WSJ) that correlations within the S&P 500 are at an all-time high presently. That means that a portfolio full of positions with very high correlations is like trading one position, magnified many times over. This said, Titan’s trade-stream covers so many securities that there are plenty that do NOT exhibit high correlations (ETFs for instance on Bonds, the VIX, etc) and thus an end user could pick and choose ideas based on a diversified set of signals.
Buying Power related decisions and Risk Profile – Every trader and PM has different risk profiles and varying levels of assets under management, buying power, etc. Each end user must take inventory of their own risk profile, capital, style, fund mandate, personality, trading style and determine how to size positions, how many positions to carry, etc.

Summary:

TickAnalyst and Titan’s strategies are excellent tools that are designed to extend a trader’s reach. TickAnalyst and the engine behind it can do many things the human eye and brain can’t do very fast or very well, certainly not in a continuous tick-by-tick monitoring of over 1000 securities in real-time. The market is generating patterns in a full range of frequencies all the way from very fast to very slow. Even the most efficient trader can only keep up with a fraction of this information – resulting in a fragmented market perception. These patterns are often inaccessible to our senses. TickAnalyst is the instrument needed to “translate” these patterns into a trade idea, with precise entries, stops, and targets. Yet, while it can do things your brain can’t, it’s not a total replacement for a professional PM, analyst, or trader’s brain. The ultimate goal is to achieve a “Human/Machine” collaboration by arming traders and PMs with a streaming source of high-quality technical/behavioral/quantitative information.

Forthcoming Attractions

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One of the most exciting aspects of working with Titan is having access to so much raw data which enables us to produce views of the market that are both fresh and exciting.
Friends and users will already be aware of TickAnalyst, our flagship product, that streams real time signals on a large universe of US and Canadian stocks, but they probably haven’t given much thought to the magic happening behind the scenes. To enable our models to produce actionable ideas we consume and store every tick on every stock that we follow together with vast amounts of information taken from social media sites.

With terabytes of data stored on our cloud servers a major challenge for our developers was how to access so much information quickly and efficiently in order to minimize the lag from our models. The success of that project has also given us the ability to slice and dice the data in any way we wish, to produce snapshot reports that may give new insights into market behavior.

Here is an example of a recent report that our analysts prepared on the Consumer Discretionary Sector.

Consumer Discretionary Dashboard

Titan regularly prepares similar dashboards on all of the major market sectors and will often prepare reports on more specialist sub sectors as well.  In fact with such fast access to so much data the only limit to what can be produced is our imagination.

The most exciting part of all this is that we will shortly be making reports of this type available to a larger audience as we continue to lead the way in Research 2.0.

 

Times of greatest fear, often present the greatest opportunities?

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Recent stock market sentiment is now considered to be almost as bad as it was back in early 2009. Having been stuck in a multi-month trading range, the jury is out on whether this pattern can continue much longer on many of the major indices, or whether a breakout is imminent. Whatever direction the market takes from here, we can be more certain of one aspect; that is, we can likely expect an increased frequency of periods of excessive volatility to be here to stay. Doomsday scenarios and panic-creating statements from the Fed’s policy to the Euro debt crisis are back grabbing the attention of the headlines, but where will the heat turn next, and will it be in a few weeks or months? Never can an awareness of this aspect be more important for today’s traders and investors.

With the Volatility Index (VIX) trading at above average levels again, from a contrarian perspective, now might be precisely the right time to be picking up long inventory in sectors that have weathered the storm better than others. Should a full scale global crisis be averted, the potential upside is substantial.

As bonds are a hot topic right now, it’s worth noting the correlation between them and the stock market itself. An interesting divergence appears to be occurring here; unlike the crisis that unfolded back in 2007-2008 where PE ratios appeared to be highly positively correlated, we are now seeing a very different picture, with the stock market on its own course and seemingly quite undervalued in comparison. This is certainly reflective of the risk-off environment we are currently facing, but with such low valuation levels across equities and the apparent discourse with safety of bonds, opportunities may well exist for patient bargain hunters that can hold their nerve!

One such place, which has shown good relative strength through the recent turmoil, has been the Consumer Discretionary sector. In fact, the index made a new all-time high recently vs the S&P500.

Recent signals generated from Titan’s behavioral models showing a positive skew towards outperformance -

Equity Research 2.0 – a new twist to an old game or truly unbiased?

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Henry Blodgett, founder of Business Insider
Talk around the water cooler at the office the other day turned to ex-Internet “Star Analyst” Henry Blodgett’s recent venture, BusinessInsider.com.  Founded by the former CEO of advertising giant DoubleClick and run by the once scorned Blodgett, I found some of my co-workers comments intriguing; “new wave of research”, “unbiased”, “revolutionary use of crowd sourcing” were some of the phrases tossed around.  I had to think about it a bit and a strange analogy came to mind.  Blodgett seemed to be cleverly using the same general investor public for crowd sourcing of investment ideas, that he suckered into pouring all their money into Internet stocks 10 years ago, with most (including me) losing big time while Blodgett and his firm made a fortune.  Now he’s suddenly a new man. Power to the people.  Isn’t that special?

T Boone Pickens

It oddly reminded me of the great capitalist from Texas, T. Boone Pickens.  I didn’t know who Mr. Pickens was until prior to the 2008 Election when his television commercials were omnipresent, “How we can reduce our dependence of foreign oil”, followed by his proposed plan to move the country to Wind Turbine Energy.  “Wow”, I thought at the time, “this old dude with the cool name could be onto something.”  I had to find out more about my new hero so I Binged him (you owe me Bill).  “Let’s see, multi-billion dollar hedge fund manager, corporate raider, oil tycoon…Blimely!”  So basically he pumped the wells dry, and was hitching his wagon to the populist Green Movement.  Sound familiar?  So forget about Blodgett’s intentions for a minute and let’s focus on the new wave in equities research, which has tremendous merit and capability to change investing for the greater good.

The importance of the high paid, big bank analyst is receding as fast as my hairline.  The Old Boy Network is out.  Blogs, comment posts and Tweets are in.  Or, an investor could decide to copy or replicate the portfolio of a well known money manager willing to share his/her ideas, the use of which is quickly rising in popularity.  Still others can subscribe to quantitatively data driven systems like Titan’s which are void of emotion or political slant to find hidden investment opportunities.  In a world where breaking news of the raid on Bin Laden’s compound was inadvertently tweeted by a neighbor (I hope Pakistan has a good witness relocation program) mainstream sources are more often than not late to the party.  I loved it when Selerity scraped Microsoft’s earnings post off of their investor relations site before the official release went out.  It was a completely legal use of technology to mine information.   There are now burgeoning technology companies like Recorded Future which provide a digital way to connect the dots between past, current and future events.  Other firms like MarketPsych Advisors use technology to trawl social media sites for bits of information on a company’s stock and grade the results on a wide range of emotions which can be extremely useful in the quest for bias free research.

Where will equity research go from here?  Will greedy minds prevail and turn what is fast becoming more fair and objective into the same old, same old?  When ol’ T. Boone got stuffed by making a wrong bet on high oil prices going higher, he turned his sights to natural gas.  I wonder what Blodgett will do 10 years from now?  The answer my friend, is blowing in the wind.