Over the years I’ve been fortunate enough to be asked to speak and different events and conventions. One of the themes that I’ve been noticing lately is the extra attention being given to customizable scans. These filters allow a trader or investor to create an algorithm to search throughout the marketplace for specific setups. These can be fundamental, technical or a combination of the two. I’ve never been a huge fan of these scans and I’ll tell you why.
Long time readers and followers know that I keep a close eye on all of the U.S. sectors and sub-sectors. I also track the Indexes and ETFs for all of the countries around the world, as well as those here in the United States. These include the Large-caps: Dow Jones Industrial Average, S&P500, Nasdaq100, and Dow Transports, but also the Mid-cap 400, Russell2000, Micro-caps, etc. One of my favorite tools is my multi-timeframe analysis of all 30 Dow components. If you get a good idea of the trend for each of the 30 Dow components, you’ll get a pretty good idea of the direction of the trend for, not just the Dow, but the US Stock Market overall.
Rather than putting together a filtration system to avoid having to look through weekly and daily charts for all of these securities, I would prefer to actually take the time to look through all of them on a regular basis. This allows me to find, what I would consider to be, the most optimal risk vs reward propositions on earth. But more importantly, going through all of these charts on a consistent basis gives me a much better feel for the overall marketplace, instead of skipping this step and having a computer do it for me.
A new investor of ours recently said it best: “It’s like a personalized JC breadth indicator”. I guess I hadn’t really thought of it that way, but I think he’s absolutely right in phrasing it that way. Going through all of the European countries allows me to get a good feel for that region overall, find where the strength is and where weakness is. Comparing emerging markets and BRIC nations to one another gives me better perspective on the relative strength and weakness between all of them. Analyzing every single sector and sub-sector in the US Stock Market emphasizes who the leaders are and which ones we want to stay away from. It also allows me to compare the ones mean reverting to the ones stuck in downtrends. I can keep going on the amount of value that this brings, but I think you get the idea.
So yes, the S&P500 could hypothetically be approaching what some might consider a key level of resistance, or the market at some point may be, “overbought”. But by looking at the components of the underlying averages, if more of them look like they are heading higher than going lower, it would be very difficult for me to be bearish. And it works both ways. While some investors might be bottom fishing in a downtrend, but it looks like more components are rolling over than bottoming out, it would be hard for me to bottom fish like others who are just focusing on one indexes’ potential support area. As cliche as it may come across, this is after all, “a market of stocks”, and not necessarily just a ‘stock market’.
To me, there are no short cuts in this market. There is no holy grail that will tell you what or when to buy and sell. I believe that it is more of a weight-of-the-evidence sort of thing. When the stars line up increasing the probability of a particular move and the risk vs reward is skewed in our favor, that’s when I want to put a position on. I think that taking the time to review all of these sectors, country indexes, US averages and Dow components helps filter through all of the daily noise and allows the investor to focus on the only thing that actually pays: price.
Sometimes I’m told by investors that they simply don’t have the time to do this on a consistent basis. Fortunately, this is what I do for a living. I manage money for investors and spend my days searching far and wide for only what I think are the best opportunities. I believe that avoiding short cuts and going through all of the data ourselves is a huge advantage over the investor who picks up the paper or watches the tv to get ideas. I am a firm believer that we all have to do our own homework. Once we identify the strong sector or country for example, then we can break it down to individual components and stocks within that group that we like the best, or hate most in the case of a negative outlook. This is what we like to call a top/down approach.
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