An Ongoing Research Process instead of Predictions

Note:  the three blog pages in this section are to answer the question, “What is unique and valuable about your approach?”


Studying the economy, making an earnings estimate for the S&P 500, and multiplying it by a P/E ratio is a logical way of forecasting a target price for the market.  I spent years following all the latest economic data and reading reports from Wall Street economists. 

However, these years of investment experience have led to the realization that making good investment decisions requires not only studying the economy and earnings, but also studying the behavior of the market itself.  This enables us to see how the balance between the buyers and sellers is playing out as developments unfold.

In his book How to Make Money in Stocks, William O’Neil, who created one of the best track records in stock market history, wrote “The key to staying on top of the stock market is not predicting or knowing what the market is going to do.  It’s knowing and understanding what the market has actually done in the past several weeks and what it is currently doing now.”

In other words, price and volume activity often provides valuable information, and sometimes acts as a leading indicator.  Therefore, diagnosing market behavior can play an important role in making good investment decisions.

My research shows that investment strategy is best done with an ongoing, comprehensive process.  By following a weekly routine, we can stay on top of all important economic and market developments.

This routine should include:

  • monitoring global macro events
  • reviewing fundamental data on stocks
  • reviewing market activity from a technical analysis perspective

The technical component does not mean just looking at a few charts.  It means having the software and procedures in place to perform a comprehensive weekly review, covering the overall market, sectors, and industry groups, along with using the computer to scan data on thousands of individual stocks. 

Using high quality charting software, I have done a lot of work building pattern recognition software, and have designed a complex technical overlay to monitor market activity.  In addition I have developed a data management process to align technical data with fundamental data on over 1,100 stocks and ETFs.

With this research process in place, we can recognize significant developments, and we can identify situations in which it would be prudent to take action in managing portfolios.  Such actions might include

  • increasing or decreasing equity exposure
  • overweighting or underweighting certain sectors
  • buying or selling certain stocks.

An example of how this process adds value beyond studying the economy and setting a price target is provided in my report “Investment Strategy Case Study.”   Other examples focused on sectors and industry groups are provided in the report “Sector Rotation.”

Various other articles under the heading “Excerpts from White Papers” contain additional examples and discussions of these issues:

  • In May 2008 this type of analysis showed that it was prudent to reduce equity exposure and move to an overweighted position in the consumer staples sector (please see the article “Long-term Market Analysis“).

     

  • In September 2014 it was clear that the energy sector should be underweighted, and in July 2016 it was clear that the semiconductor group should be overweighted (please see the article “Sector Rotation“).

     

  • In February 2016 the conclusion was to increase equity exposure and buy certain stocks such as Nvidia (NVDA) (please see the article “Short-term Market Analysis“).

     

  • In April 2017 this process led to the conclusion that we should overweight the technology sector and buy electronic gaming stocks such as Take Two Interactive (TTWO) (please see the article “Managing Data Effectively“).

     

  • In early October 2018 the conclusion was to adopt a more defensive investment posture, underweight the technology sector, and overweight the utilities sector (please see the article “Investment Strategy Case Study“).

     

  • In late December 2018 the conclusion was to increase equity exposure, to take advantage of the market’s extremely oversold condition.


In each of these cases, the research process discussed above leads to valuable investment conclusions in a forward-looking way.  Because it is based on proven investment principles, this logical research process is likely to continue creating good investment outcomes in the future.