NOTES FROM THE MTA SYMPOSIUM, TREND FACTOR APPROACH, POSITION SIZING MATTERS, TREND FOLLOWING IS TOUGH, PAPER BEATS ROCK, MIND THE CENTRAL BANKS, RIDE THE TREND TO THE END, FOCUS ON WHAT IS

NOTES FROM THE MTA SYMPOSIUM... As John Murphy pointed out on Friday, Stock futures were down sharply after weaker-than-expected non-farm payrolls. The S&P 500 and Nasdaq were down around 1%. Treasury bonds moved sharply higher as the 10-YR Treasury Yield ($TNX) fell below 1.85%, and to its lowest level since early February. Oil followed stocks lower with a 2% decline around midday. The Euro bounced with a 1% gain against the Dollar. Despite Dollar weakness, gold was down around a half percent. Chart 1 shows the patterns and trends taking shape in the inter-market arena.

(click to view a live version of this chart)
Chart 1

Today's Market Message will present some notes from the Market Technician's Symposium in NYC last week. It was a great event with several excellent speakers. There was certainly too much information for one market message, but I have managed to cull my notes and provide some highlights. There were a few trend-followers presenting this year, which was nice because I am a trend-follower at heart. The next sections offer a few bullet points from the presentations and a chart or two. The quotes are not verbatim, but rather paraphrased from the presentations and I have expanded on some thoughts. For compliance purposes, I have excluded the names of some of the presenters. Here is a link for the speaker list and agenda.

TREND FACTOR APPROACH...

* Technical analysis is a way to organize big data. In fact Ralph Acampora CMT notes that charts represent data visualization at its best. To bad we didn't coin that term first!

* It is important that your investment process is guideline driven and repeatable.

There are two distinct trend phases: in the pattern or in the trend. If the trend is up and the stock is rising, then it is in trend. If the trend is up and the stock is correcting with a pullback or consolidation, it is in pattern. Chart 2 shows Bed Bath Beyond (BBBY) with an "in trend" move from November to January and an "in pattern" move this year. A breakout at 78 would signal a return to "in trend".

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Chart 2

Using a trend factor approach can help chartists cull their list. For example, chartists can use four factors to define the long-term trend: above the 200-day moving average, a rising 200-day moving average, below the 200-day moving average and a falling 200-day moving average. The strongest stocks are those with two bullish trend factors: above the 200-day SMA and with a rising 200-day SMA. The weakest stocks are those with two bearish trend factors: below the 200-day SMA and with a falling 200-day SMA. The others fall somewhere in the middle. Chartists should focus longs on the strongest and clearly avoid the weakest. The BBBY example above shows the stock moving from the weakest trend-combination to the strongest trend-combination.

POSITION SIZING MATTERS...

* Focus on your process.

* In the long run, doing the right thing is more important than being right. Executing one's plan is simple, but certainly not easy.

* The German DAX Index ($DAX) is a total return index that includes dividends. The S&P 500 is not and you really cannot compare performance.

Trend following systems work, but they are difficult to execute because there are numerous small losses. Traders need to take all their signals in order to catch the few big winners that make the system work. It is the length and size of the losing streak that affects traders psychologically and emotionally. If you have a win rate of 40%, which is normal for trend-following systems, there is an outside chance of 18 consecutive losses. Chart 3 shows a slide from the presentation. If 4 of 10 trades are winners and you risk 4% on each trade, you will be down 50% after 18 consecutive losses. In contrast, if you risk 1% on each trade, you will be down 50% after 68 consecutive losses. Position sizing, therefore, is very important to your financial and emotional well being.

Chart 3

TREND FOLLOWING IS TOUGH... Riccardo Ronco showed that a simple trend-following model using monthly moving averages works, especially on a risk-adjusted basis. Remember, risk is reduced when you are out of the market. Chart 4 shows a simple trend following system using monthly exponential moving averages (6, 9 and 12). Chartists can use these different moving averages to scale in and out of the market. In this example, chartists can scale into the market as QQQ moves above the six, nine and twelve month exponential moving averages. Similarly, chartists can scale out as QQQ moves below these moving averages. There are definitely whipsaws here, but you can see that this system would have been OUT during two bear markets and IN during the bull runs. You can't win if you don't play. By the way, the PPO(1,6,1) is positive when the 1-period EMA (close) is above the 6-period EMA.

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Chart 4

PAPER BEATS ROCK...

* The golden bullet is a value stock with price momentum and relative strength (from What Works on Wall Street by James O'Shaughnessy).

* The big theme right now is paper covers rock (think paper scissors rock). Intellectual property (tech, biotech) is beating commodities (steel, mining, energy). Hat tip to the speakers from Fidelity.

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Chart 5

MIND THE CENTRAL BANKS...

* In Africa, one's first experience with online banking usually occurs on a cell phone, not on a computer or tablet.

* There are three possibilities when we look at a chart (This is a classic from David Fuller.)
1) We see what we WANT to see.
2) We see what we THINK we see.
3) We see what IS really there.
The challenge is to leave our biases behind and see what is really there.

* Three Macro Themes:
1) Rise of global middle class
2) Exponential pace of technological innovation
3) Lower energy prices are not a short-term phenomenon

* We do not know the long-term affects of quantitative easing, but we certainly know the short-term affects. QE leads to inflated asset prices and Europe is just beginning. Eion Treacy's chart below shows the combined balance sheet expansions for the world's biggest central banks. It has leveled off in recent months, but should turn up again as The European Central Bank (ECB) program kicks in.

Chart 6

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Chart 7

THE "OTHER" DOLLAR INDEX... Eoin Treacy also showed a most interesting chart of the "other" Dollar index. We are all familiar with the "normal" Dollar Index ($USD), which is heavily weighted to the Euro (57.6%). There is another Dollar index available at the St Louis Fed Database that shows the Dollar relative to other important trading partners (sans Euro, Yen, Pound). These include Mexico, China, Taiwan, Korea, Singapore, Hong Kong, Malaysia, Brazil, Thailand, Philippines, Indonesia, India, Israel, Saudi Arabia, Russia, Argentina, Venezuela, Chile and Colombia. Chart 8 shows this index also breaking out with a move above the 2012 highs this year. Dollar strength is not just against the Euro and Yen. It is also against these other currencies. In short, it is pretty much global.

Chart 8

RIDE THE TREND TO THE END... K.D. Angle is a pure system trader and Commodity Trading Advisor (CTA). He is a trend-follower who has seriously researched market behavior. Many moons ago he published several articles in Stocks & Commodities Magazine that StockCharts users can access. Yes, the S&C article archive is available to members. I will include a link after some bullet quotes.

* Blues is to rock-and-roll what managed futures is to technical analysis. Managed futures is all about trend-following. (love this one!)

* You are not going to catch a wave if you are not in the ocean.

* The percentage of days (in a year) that contribute to the trend: 12 to 13%. The remaining price movements are either sideways or counter-trend.

* KD Angle wants to hold for the duration of the trend. This means he will enter after the trend has started and lose money on the backside because he will exit after the top. It also means that he rode the trend for all it was worth.

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Chart 9

FOCUS ON WHAT IS...

* Acknowledge the fact that you cannot forecast. Focus on what IS, and act on what IS. (Hat Tip to Wellington).

* It is human nature to be reluctant to buy stocks that have already gone up and are already outperforming. It is also human nature to attempt to pick bottoms and tops. Trading goes against human nature, but the trend does not.

* The only way to guarantee winning is to buy winners. This means buy stocks that are already in uptrends and already outperforming.

* Three step process:
1) Find stocks and ETFs showing relative strength.
2) Narrowing this list by eliminating those with bad trend structures.
3) Buy the leaders and take positions in leaders when they correct.

Frank Teixeira did not use the StockCharts Technical Rank (SCTR) in his example, but I should point out that you can find stocks showing relative strength by looking for SCTRs above 80. The example below shows the top large-cap stocks right now. The list incluces three health care providers (CI, HUM, AET), a homebuilder (LEN) and several retailers (KSS, DLTR, LB, WBA, LOW).

Chart 10

THANKS FOR TUNING IN... and have a great weekend!

Twitter: @arthurhill

Arthur Hill CMT