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

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SumGrowth Strategies, LLC Seattle, WA

New Tools Destroy Old Rules

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Teach a Man to Build a Strategy … Feed Him for a Lifetime Give a Man a Buy List … Feed Him for a Day

Go-Go 80’s Stock Market

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100 %

But My IRA Funds Were Flat !!

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These Guys Are All Just a Soap Opera.

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Diversify - Rebalance Diversify - Rebalance

Mass Hypnotism

Own a little bit of everything ... So you can achieve precisely Average Performance What’s Up With That?

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Does Recent Market Data Hold Clues for Future Prices?

Do Price Trends Exist?

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Does Recent Market Data Hold Clues for Future Prices?

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1992 Spreadsheet Experiment:

Do Market Data Trends Exist?

Yes! Trends Exist.

Three Sector Funds

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Desktop Version in Windows – 2004+

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SectorSurfer Online Charts

SectorSurfer Strategy:

• You select up to 12 ticker symbols to participate.
• The trend algorithm picks which one to own now.
• Email trade alerts are sent typically 3-5 times/yr.

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Trends are Real ... (Markets are Not Efficient)

2. Risk & Return are Not Mutually Exclusive. 3. There's an Optimum Trend Extraction Method. 4. Which Trend is Your Friend? It Really Matters. 5. How to Build True Sector Rotation Strategies. 6. Forward-Walk Progressive-Tuning Provides Credibility. 7. Tactical Diversification Addresses Risk in Three Ways. 8. Evidence These Methods Work in the Real World.

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• - Review --

Efficient Market Hypothesis

• Prices already reflect all past publicly available information.
• One cannot consistently achieve returns in excess of average.
• Stock and other asset prices follow a random walk model.

If TRUE, Diversification is Best. But if Trends are Real, E.M.H. is False.

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Developed by: Edwin Hurst in 1907 Nile River Dam Project Water Flow Character

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Hurst Exponent H = Slope of Line

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Profitability of Momentum Strategies: An Evaluation of Alternative Explanations

By Narasiman Jegadeesh and Sheridan Titman (2001)

1.65% / mo. = 21.7% / yr 0.40% / mo. = 4.9% / yr

Document Link: Profitability of Momentum Strategies

16.8% Diff.

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The case for momentum is now so strong, these two fathers of modern finance, call momentum

“the premier market anomaly” that’s “above suspicion.”

Eugene Fama

• Univ. of Chicago

Kenneth French Dartmouth College

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Time Domain Data: Prices & Trends

Time Domain

Fund Prices Price Trends

The Best Trend Is Our Friend.

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TRENDS, by definition, are a “Portal to the Future.” Trends ARE the crystal ball we hope to find.

We’re NOT limited by Average Performance.

Where something in the near past ... ... tells us something about the near future.

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1. Trends are Real ... (Markets are Not Efficient)

2. Risk & Return are Not Mutually Exclusive.

3. There's an Optimum Trend Extraction Method. 4. Which Trend is Your Friend? It Really Matters. 5. How to Build True Sector Rotation Strategies. 6. Forward-Walk Progressive-Tuning Provides Credibility. 7. Tactical Diversification Addresses Risk in Three Ways. 8. Evidence These Methods Work in the Real World.

• -- Review ---

Modern Portfolio Theory

• One Must Trade Risk for Return.

MPT Tenets

• Market Prices are Gaussian Distributed
• Rational Investors Trade Risk for Return
• Risk is Measured as Standard Deviation of Return
• Risk is Reduced by Owning Uncorrelated Assets
• The Efficient Frontier is the Set of Best Portfolios

Must I Trade Risk For Return?

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MPT Tenets

• Market Prices are Gaussian Distributed
• Rational Investors Trade Risk for Return
• Risk is Measured as Standard Deviation of Return
• Risk is Reduced by Owning Uncorrelated Assets
• The Efficient Frontier is the Set of Best Portfolios

Must I Trade Risk For Return?

SectorSurfer Thinks Otherwise

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w/ Comments

• Fails to Consider the Tails are Way Too Fat
• Fails To Consider New Tools Change the Game
• Fails to Consider Big Returns Aren’t a Bad Thing
• Fails to Consider Temporal Avoidance Strategies
• Fails to Consider that the Efficient Frontier is an

Artifact of Unfortunate Self-Imposed Constraints from Discarding Time Domain Trend Information

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MPT Tenets

• Market Prices are Gaussian Distributed
• Rational Investors Trade Risk for Return
• Risk is Measured as Standard Deviation of Return
• Risk is Reduced by Owning Uncorrelated Assets
• The Efficient Frontier is the Set of Best Portfolios

Must I Trade Risk For Return?

SectorSurfer Thinks Otherwise

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w/ Comments

• Fails to Consider the Tails are Way Too Fat
• Fails To Consider New Tools Change the Game
• Fails to Consider Big Returns Aren’t a Bad Thing
• Fails to Consider Temporal Avoidance Strategies
• Fails to Consider that the Efficient Frontier is an

Artifact of Unfortunate Self-Imposed Constraints from Discarding Time Domain Trend Information

Can you help a disabled investor? I lost my Time Domain leg and I don’t know what to do next!

MPT Can’t Pick Anything to

Own or Avoid Next Month!

Must I Trade Risk For Return?

How to Break Through the Efficient Frontier

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Let’s Try MPT

“Diversify and Rebalance”

Portfolio Investment Options

Uncorrelated Assets

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Uncorrelated Assets

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Uncorrelated Risk  1/ N

Conclusion:

“Diversify and Rebalance” Improves Risk, But NOT Returns.

Must I Trade Risk For Return?

How to Break Through the Efficient Frontier

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Diversify— Rebalance Portfolio Investment Options

Diversify & Rebalance Didn’t Get Us There.

Let’s Try Trends

“Own the Trend Leader”

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Trend Indicators

Serial Diversification:

Owning many funds, but only one at a time. BY OWNING ONLY THE TREND LEADER

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The Game: Extract Trend Signals From Noisy Data.

Market Noise Makes Our Crystal Ball Foggy

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1. Trends are Real ... (Markets are Not Efficient) 2. Risk & Return are Not Mutually Exclusive.

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There's an Optimum Trend Extraction Method.

4. Which Trend is Your Friend? It Really Matters. 5. How to Build True Sector Rotation Strategies. 6. Forward-Walk Progressive-Tuning Provides Credibility. 7. Tactical Diversification Addresses Risk in Three Ways. 8. Evidence These Methods Work in the Real World.

My Career Has Been All About

Digging Signals Out of Noise!

My Tools for the Job

• MSEE Stanford University - 1976
• Photoelectric Sensors & Controls – Book
• Inventor - Over 40 US and Foreign Patents
• Electronic Signal Processing Theory Focus

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• Matched Filter Processing

– Filter Shape Basis

• Differential Signal Processing

– Common Mode Noise Elimination Its All About

Reducing Noise to Reveal the Signal

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For a Detailed Technical Description, View the AAII Seminar Vide on the Home Page.

35 Consistent Positive Correlation is Common Mode Noise

Filtering Common Mode Noise

Reveals Trend Differences

36 Opposite Trends

Diversification Does Not Justify Owning Bad Funds

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Matched Filer Matched Filer

Ethernet and USB Signal Processing is Done This Way for Good Reason.

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It’s not a solo contest.

It’s a horse race!

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1. Trends are Real ... (Markets are Not Efficient) 2. Risk & Return are Not Mutually Exclusive. 3. There's an Optimum Trend Extraction Method.

4. Which Trend is Your Friend? It Really Matters.

5. How to Build True Sector Rotation Strategies. 6. Forward-Walk Progressive-Tuning Provides Credibility. 7. Tactical Diversification Addresses Risk in Three Ways. 8. Evidence These Methods Work in the Real World.

Trend Options are Many

Period – Week? Month? Quarter? Year? Algorithm – MACD? SMA? EMA? DEMA?

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Profitability of Momentum Strategies: An Evaluation of Alternative Explanations

By Narasiman Jegadeesh and Sheridan Titman (2001)

Their Choices:

• 1. Trend Algorithm:

S.M.A.

• 2. Averaging Period:

6 Months

• 3. Periodically Repeat:

6 Months

As an engineer, I want to turn all of the knobs. I want knobs that go to 11.

What Happens When We Turn the Knobs?

Jegadeesh & Titman

What Happens When We Turn the Knobs?

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What Happens When We Turn the Knobs?

Fidelity Sectors

Fidelity Countries ETF Sectors Dozen DJ-65 Stocks

What Happens When We Turn the Knobs?

Fidelity Sectors Fidelity Countries ETF Sectors Dozen DJ-65 Stocks SMA: Simple Moving Average

What Happens When We Turn the Knobs?

Fidelity Sectors Fidelity Countries ETF Sectors Dozen DJ-65 Stocks Month-End Trade for Various Moving Averages

Conclusion:

Trend Algorithm and Time Period Matter!

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1. Trends are Real ... (Markets are Not Efficient) 2. Risk & Return are Not Mutually Exclusive. 3. There's an Optimum Trend Extraction Method. 4. Which Trend is Your Friend? It Really Matters.

5. How to Build True Sector Rotation Strategies.

6. Forward-Walk Progressive-Tuning Provides Credibility. 7. Tactical Diversification Addresses Risk in Three Ways. 8. Evidence These Methods Work in the Real World.

Serial Diversification

Sector Rotation – Asset Class Rotation

Strategy-of-Strategies

Reduces Risk of Returns Going Flat

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Market Cycle Economic Cycle

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Smooth Powerful Ride:

• All Pistons Are Firing
• No Missing Power Strokes

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• Own Only the Trend Leader
• No Missing Power Strokes

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Serial Diversification

True Sector Rotation – Own One at a Time

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Serial Diversification

Asset Class Rotation – Own One at a Time

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Crowd Sourced - Strategy Design

Stand on the Shoulders of Those Who Have Gone Before.

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What if my Strategy Gets a Flat Tire in the Future? Its Funds Could all go Flat. How can I be Sure I’m in the Best Strategy?

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It Seems You’ve Selected Your Funds in Hindsight.

IBB REM SOXX IYR IYE IHF IYW IHI IAT ICF IHE IYZ IYF IYJ IEO IYT IYC ITA IDU IYG IEZ IYH IYK REZ ITB IAK IAI IYM FTY IAU

30 iShares Sectors

FIUIX FSVLX FSCPX FBMPX FSAIX FBSOX FDFAX FSNGX FSAVX FSCGX FSDAX FNARX FSRBX FCYIX FSELX FPHAX FBIOX FSPCX FSENX FSRPX FSLBX FDLSX FSESX FSCSX FSCHX FSDPX FSLEX FSPTX FSDCX FSHCX FIDSX FSTCX FDCPX FSMEX FSAGX FSRFX FSHOX FSLXX FSPHX FSUTX

40 Fidelity Sectors

EWJ INDA EWM EPOL EDEN FXI EWA THD HEWG UAE EWG EWP EZA EWN QAT EWY MCHI EPHE ENZL ECNS EWZ EWL EWD EWK EWZS EWT EWS EWQ SCJ FCHI EWU INDY HEWJ EIS EWGS EWH EWI ECH EIRL SMIN EWC EIDO ERUS ITF ENOR EWW TUR EPU EWO EFNL

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Hindsight Selection Bias Can Produce Questionable Future Performance Estimates. How Will You Reduce Risk of Selection Bias?

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Strategy-of-Strategies

Reduces the Risk of Selection Bias. Avoids Strategies that Get Flat Tires.

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Vanguard HoF SOS (Hall of Fame Strategy of Strategies)

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1. Trends are Real ... (Markets are Not Efficient) 2. Risk & Return are Not Mutually Exclusive. 3. There's an Optimum Trend Extraction Method. 4. Which Trend is Your Friend? It Really Matters. 5. How to Build True Sector Rotation Strategies. 6. Forward-Walk Progressive-Tuning Provides Credibility. 7. Tactical Diversification Addresses Risk in Three Ways. 8. Evidence These Methods Work in the Real World.

• Split Sample Stationarity
• Forward-Walk Progressive-Tuning

The Question Really Is:

Can This Series of Trades Actually Be Found Walking Forward in Time? Without the Vision of Hindsight?

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1s Half --- --- 2nd Half

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Independent of Market Performance Trend Character Remained the Same.

• - Optimum Parameter Tuning Was Consistent --

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Now Use Next 125 Days

Tuned Only With Past Data

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1. Trends are Real ... (Markets are Not Efficient) 2. Risk & Return are Not Mutually Exclusive. 3. There's an Optimum Trend Extraction Method. 4. Which Trend is Your Friend? It Really Matters. 5. How to Build True Sector Rotation Strategies.

6. Forward-Walk Progressive-Tuning Provides Credibility.

7. Tactical Diversification Addresses Risk in Three Ways.

8. Evidence These Methods Work in the Real World.

Layers Add Value Layered Diversification

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Reduces Individual Company Price Collapse Risk Reduces Short-Term Volatility Risk Owning Divergent Strategies Trends Used to Avoid Risk of Longer Term Under Performance

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Post-Surfing Diversification

Surf First to Capture Returns – Then Diversify

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This Is:

Post-Surfing Diversification

The Final Step of

Tactical Diversification

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1. Trends are Real ... (Markets are Not Efficient) 2. Risk & Return are Not Mutually Exclusive. 3. There's an Optimum Trend Extraction Method. 4. Which Trend is Your Friend? It Really Matters. 5. How to Build True Sector Rotation Strategies.

6. Forward-Walk Progressive-Tuning Provides Credibility. 7. Tactical Diversification Addresses Risk in Three Ways.

8. Evidence These Methods Work in the Real World.

So, What About:

• Performance Decades Earlier?
• Performance Since Inception?
• Statistical Relevancy Studies?

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30x 4x 10x

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Born Oct. 20, 2011 – Parameters Frozen

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Born June 18, 2009 – Parameters Frozen

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It’s Real Money … Algorithms Matter

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Mom Can Do IT.

• Uses SectorSurfer
• She is 87 years old
• Journalism degree
• Still blogs online

dajuds

cheap $10/month for a Premium Strategy

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The meeting begins at 19:00 PM

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Integrated Bear Market Strategies

September 8th, 2016