Battered.

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27th Sep '18 by fahimc

28 comments 6798 reads

I am following a high stock-rank screen which tends to pay dividends. I have been beaten by the markets recently with the whole portfolio down by 11% in last 3 months.

Cenkos down 30%
IGG down 25%
Bonmarche down 25%
Griffin Mining down 30%
Royal Mail down 15%
Numis down 15%
Wynnstay down 10%
Hanstten down 10%

All these shares had a SR of 99+ when I bought them about 2 months ago.

I hope this is the 1/3 of probability of picking losers from the high stock ranks is playing out!

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About the Author

Fahimc

Premium Member

28 comments

Howard Adams

28th Sep '18

Hi

An excellent posting, thank you.

Might you do an equivalent for some stocks you do indeed favour (I have seen several of these across the threads but would be interested to see them in a single post).

I found your reasonings in this post about the negatives of stocks with regard to their respective market/business contexts to be very thought provoking. A nice exemplar about taking a wider perspective and how to articulate that information succinctly.

Regards
Howard

Edward Croft

28th Sep '18

@fahmic - of course you also have to be extremely mindful of transaction costs ! I wish it were easy!

The following graphic illustrates the increasing volatility of each risk rating. I haven't updated it in some time so it's only up till early last year, but it shows the general idea. Riskier stocks tend to outperform in upswings, but underperform in downswings. There's a real tortoise/hare phenomenon that goes on in the market. If you want to read up on it check out this book by Pim Van Vliet - https://www.stockopedia.com/co...

5badf416dd08dImage_2018-09-28_at_10.27.1

dfs12

28th Sep '18

It seems what we need is a reliable "risk on"/"risk off" indicator. Any change you could build one Ed? (Just keep it secret from the outside world once you've built it - just Stocko subscribers ok!)

Blissgull

28th Sep '18

Well perhaps now you have the reason. It does appear that something was a little leaky at Numis.

HumourMe

28th Sep '18

It seems what we need is a reliable "risk on"/"risk off" indicator. Any change you could build one Ed? (Just keep it secret from the outside world once you've built it - just Stocko subscribers ok!)

When the slope of the X month moving average of highly speculative returns changes direction?

WarrantStar

28th Sep '18

dscollard

Thanks for your very interesting comments.
Have you (or anybody else) ever tried the rule of selling if the share price drops below the 100 day moving average? Is there any particular reason why you have adopted the rule based on the 200 day moving average?

Benson212

28th Sep '18

Hi Warranstar

The use of moving averages should be part of every traders toolkit in my opinion. Paul Tudor Jones, a multi-billionaire hedge fund manager who created his fortune from combing technical and fundamental analysis, states the 200-day moving average as "the bull's last stand".

Famously, he as a hard and fast rule... if the share price for a particular stock is trading below its 200 day moving average, he either doesn't own it or he is short.

The chart below illustrates the 200 day MA on a weekly chart of the S&P500. If you bought the S&P 500 index at its peak in 2007, you would have only suffered a 16% loss to your portfolio, rather than the 50% most people experienced when they sold at the bottom!!

Using a tighter moving average simply reduces the amount of "breathing space" you give the stock. There's nothing wrong with using a 100 day moving average, provided it fits your trading style and risk tolerance.

5bae42abf2a14Chart-s-p-500-index-2882018

Kelvin Prescott

28th Sep '18

Thanks Ed - really useful.

@fahimc I had a very similar experience to yourself when creating my Stockrank based system. In my case I experienced a decline of 15% in the first six months. The main lessons I learned were:

1. My original portfolio was too restricted (too few stocks - only 10) which made it volatile. The failure of a small number of stocks, e.g. Indivior, had a big effect on value. Need to aim for something closer to 20.
2. I didn’t think about sector balance. I ended up with 4 (40%) of my portfolio in housebuilders and related companies. As a result when there was a sector specific decline, the impact on my portfolio was disproportionate
3. I had restricted my universe of stocks solely to those over £1Bn. At the time I ran my screens there were precious few that had a very high stockrank (which then led to my problem with sector balance).

I since applied a number of further rules to mitigate these risks and have, touch wood, had much better results since.

Kelvin

Nick Ray

28th Sep '18

There's no way that plot is a 200-day MA. It looks closer to a 200-week MA to me.

Taff6

29th Sep '18

Following on from Nick, BH1991 and dscollard's posts. That's one of the reasons that the 50 day MA is so popular. If you draw a 50 period MA on a price chart it can be used to determine short term trend on daily chart (traders) and long term trend on weekly charts (investors). A weekly close below the 50 period MA is the equivalent of what dscollard states in respect of "adopting a discipline of selling shares that dip below their 200MAs and stay there more than a few days is a good practice".

peterg

29th Sep '18

Looks great, but which of those crossings do you use in practice? It's easy with hindsight and someone has stuck selective buy and sell labels on, which look great. But look more closely. There are 3 pairs of close crossings in early 2004 - would you have bought and sold all those, with costs? And again early 2008, just before your marked sell signal. And then you would sell, and buy again in mid 2011.

Peter

fahimc

1st Oct '18

Royal mail down another 20% today. SR=99
Numis down another 12% on Friday. SR=97

dscollard

2nd Oct '18

I don't solely rely on the 200MA: it is however a well know convention and so many investors as well as buying programmes will work around it

For short term swing- trades I use 8 and 21 EMAs (they map to 2 weeks and a month's trading periods) : more than 2 consecutive closes below a 21EMA tends to be a sell signal for me. I use EMAs as the exponential component reacts quicker to price movements in the shorter term so it alerts to a change in trend quickly: these are applied to real mo-mo scenarios, strongly trending growth stocks and breakouts. Observation of the chart will tell you if the price action is behaving: a good example is Sosandar (LON:SOS): it hasn't closed below its 21EMA on more than 2 days since April 2018 so I have stayed long (chart below: 8EMS is green and 21EMA is blue)).

Other prospects will follow different support and resistance phenomenon: these are just proxies for supply and demand so shares that have been around longer than Sosandar (LON:SOS) will behave in different ways as there is history in the price. The trick is to fathom if there is any method in the price action : if it isn't fairly obvious (to a trained eye) then it probably isn't there. Many shares spend a lot of their time wandering sideways which is great for investors but an opportunity cost for traders . Others may be too ill-liquid so they don't behave well as they lack the volume for momentum to behave reliably.

Technical analysis gives a framework to hang some hypotheses on: the observables in the price action will either validate or violate those hypotheses. I am most interested in volume and price as a function of time as these are the only absolutes on any chart: everything else is derived from these no matter how esoteric the indicator.

As I said, used in conjunction with fundamentals and particularly factor-based numeric scores gives me a route to a fairly numeric scoring for prospects which takes a good bit of the bias out of it. Most of my errors are not due to my systems, they are due to me violating my systems.

I also use 50 and 100MAs for short and medium term timescales

Typically I want any long prospect to be above 50 100 and 200 MAs although I do trade reversals but they have different rules and stake building protocols to reflect the heightened risk (i.e building a stake if the price action goes in one's favour with trailing stop-losses to mitigate risk) . As well as Stocko I use ShareScope with a lot of my own datamining rules for fishing out prospects with the right volatility and liquidity to make them tradeable

Often fundamentals may tell you where a share should be (its potential) but technical analysis tells you about its pathway (its kinetics). There are many cases where the fundamentals lag the technicals : the truth is often in the price

ACounsell

2nd Oct '18

Hi Ed,

Your explanation of the construction of your portfolio in terms of sector diversification and risk exposure is what underlies the NAPS/SNAPs portfolio. As you have often said the NAPS portfolio is all about probability and selecting 20 shares according to well defined rules has proved very successful to date with many more winners than losers. I agree that DYOR is essential across a wider portfolio but the NAPS strategy is a strict rules based system and selecting the shares involves no additional research as I understand it. This approach is perhaps most suitable for the investor/trader (?) who wants some exposure to the market but hasn't the time or inclination for detailed research. I follow a variant of the NAPS strategy for a relatively small % of my total portfolio, holding 20 shares that meet the sector/risk profile rules but which combine some of my high ranking existing holdings (Next (LON:NXT), BP (LON:BP.), GlaxoSmithKline (LON:GSK), Rio Tinto (LON:RIO), Persimmon (LON:PSN), £SOM) with the NAPS selections. At the HY rebalancing I also retain shares that fit the criteria and still have a high ranking (90+) but might not be the absolute highest in terms of stockrank. These two 'tweaks' and allowing one extra share in a sector (4 vs. 3) has the the benefit of minimising trading cost without a major compromise to the risk exposure.

I sympathise with fahimc as my variant of SNAPS is down about 6% (reduced to 3.4% loss with dividends received) from the HY rebalance but more interesting perhaps are the worst performers over this period (since July 2). At this point I have to take issue with your statement 'The more conservative/balanced shares have held up far better in the recent decline.' Specifically 4 of my 6 worst performers are Conservative or Balanced stock selections: Royal Mail (LON:RMG) (-28.9%), Numis (LON:NUM) (-25%), Hansteen Holdings (LON:HSTN) (-9.9%) and Bloomsbury Publishing (LON:BMY) (-9.9%). Is this a random inconsistent result or is it the start of much greater share volatility and the breakdown of the relationship illustrated by your graph in a later blog in this section?

Edward Croft

2nd Oct '18

Andrew - I'm doing some analytics on the last 3 months. I'm excluding the HighlySpeculative bucket here as there are only 4 stocks in it above a 90 StockRank - the other buckets have substantially more in them.

So yes, there's declines all round, but we can clearly see Speculative stocks have been hit hardest. There's not much to read into the other buckets at this stage - 3 months is definitely too short a time period.

5bb3c0fe63f98Image_2018-10-02_at_8.02.59

ACounsell

2nd Oct '18

Ed, - I see the Stockopedia ranking algorithm now reflects the fall in Numis (LON:NUM) share price - the SR has fallen to 83 and it is now classified as a Adventurous with a Contrarian stock style. As we have discussed before the NAPS portfolio is inevitably a moving target changing it’s constituents almost daily. This must make your analytical efforts a bit like a balance sheet - a snapshot of the situation on one day in 365! As with Numis (LON:NUM) I anticipate that we will see a significant reclassification of Royal Mail (LON:RMG) over the next few days given the dramatic recent falls

AnonymousUser192020

3rd Oct '18

A dumb question or two on the responsiveness of SR changes to new information, specifically the SR components that build on earnings forecasts. I assume:
1. The forecasts used are an average of all current broker forecasts.
2. Stockopedia (or its data provider) has access to all mainstream published research (or has MIFID limited this?).
3. For large caps, brokers/ analysts are at their spreadsheets on the morning of planned company updates (or indeed may be privy to embargoed news the evening before?). So they will update their forecasts later that day.
4. Unscheduled trading updates may catch them off guard and they may take a day or two to update forecasts.
5. For small caps there may be only one or two understaffed brokers who may take appreciably longer to react.
6. I don't know what happens when there are no brokers following a company - does the nomad always issue forecasts, or does the company itself do so?
7. Is the process for updating SR components for new broker forecasts fully automated, or is some manual entry by Stockopedia staff required?

Are the above assumptions broadly correct or have I mislead myself somewhere? What I'm trying to get a handle on is how many days it typically takes for an earnings up/ downgrade to fully wash through into the SR.

Thanks

Albertos

4th Oct '18

On point 6, there is no requirement to have published forecasts - see James Latham (LON:LTHM) and MS International (LON:MSI) - I'm sure there are more - mainly small I guess and unwilling to pay for the service

Phil

Edit: Note the effect it has on the daily volume figure

AnonymousUser192020

4th Oct '18

Thanks Phil. I wonder also if sometimes we could see counter-intuitive effects on the Value component. Eg for a commodity/resource stock, when the underlying oil, zinc or whatever price is falling then we can expect investors to gradually drop the share price yet earnings forecasts remain unchanged, with consequent fall in PER, until analysts find a trigger to review them.

Albertos

4th Oct '18

That's my view as well.

Logically, you'd expect an analyst to react to a significant changes in forecast commodity prices rather than the day-to-day volatility which is left to the market. This does mean, especially in the case of smaller stocks which have less analyst coverage, it's worth spending a bit of time considering how out of date the forecasts might be, and its impact on the data (PER,revenue growth ......) .

I do a bit of a quick sense check using the last half-year accounts ( really useful feature on Stockopedia) and high-level commodity price movements.

Phil

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Fahimc

28 comments

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