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2012

Delving into VectorVest 7. 2012. Jim Tebay jimt914@comcast.net. Disclaimer. Although every precaution has been taken in the preparation of this presentation, the author assumes no liability for errors or omissions It is offered without a warranty of any kind, either expressed or implied

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2012

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  1. Delving intoVectorVest 7 2012 Jim Tebay jimt914@comcast.net

  2. Disclaimer • Although every precaution has been taken in the preparation of this presentation, the author assumes no liability for errors or omissions • It is offered without a warranty of any kind, either expressed or implied • All concepts should be taken as points of departure for serious individual research into using VectorVest 7-- AND NOTHING MORE • Use of this material constitutes your acceptance of these terms.

  3. Trading Profile • My education was in engineering/management • My career was in high tech. I am retired • As a part-time trader for over 15 years, my stock analysis program was initially AIQ, then TC2000, and is now VectorVest • I have NO affiliation with VectorVest, except for using their products • My trading interests are in developing and teaching winning systems.

  4. This Presentation’sObjectives • To illustrate means for: • Making money in differing market conditions • Developing trading plans that work • Reinforcing day-to-day discipline • Improving stock selection through cherry-picking • Using plans and checklists for consistent gains • To reveal lesser known features of VV7 • To have you leave with useful ‘take-aways.’

  5. ‘You have to learn the rules of the game… and play them better than anyone else.’Albert Einstein This presentation is mostly rule-based, i.e., mechanical. Exception examples are cherry-picking or partial profit-taking. A symbol (d) appears in slides, which include discretionary material

  6. A FavoriteVectorVest Saying • ‘The secret to making money is knowing When to buy? • A Market (and optionally, a Stock) Timing Question What to buy? • A Search Question When to sell?’ • A Stop, Market Timing, or Partial-Sell-Off (d) Question • Answers to these three questions create the framework of a trading plan.

  7. Making the Questions Meaningful 1. When to buy? • At date of (or after) entry signal from one of the four built-in VectorVest’s market timers or from a custom timer (when timing for an entire portfolio) • And, if used, date of an entry signal from a stock timer (when timing for an individual position in portfolio) • And, if used, a follow-through from prior day • Specifically, 10 to 10:30 AM Eastern, if possible • Or, if back testing, at the outset of a specific look-back period.

  8. Questions (Cont) 2. What to buy? • Selected stocks from a built-in or modified search, or • Selected stocks from Derby Winner searches • Then, from the above, cherry-picked stocks (d) (see later slides re cherry-picking) 3. When to sell? • At date of exit signal from stop loss and/or target stop (for individual stocks in portfolio) • Or, a date from standard or custom market timer (for entire portfolio) • Or, let the portfolio extinguish (as individual positions get stopped out) • Or, through partial profit-taking (d).

  9. Another Favorite Saying • ‘Buy safe, undervalued stocks that are rising in price in a rising industry in a rising market.’ Saying is valid for an up-market • A corollary is also factual: ‘Sell unsafe, overvalued stocks that are falling in price in a falling industry in a falling market.’ This statement is valid for a down-market • These adjectives in the narration, i.e., safe, can be reduced to parameters in a search.

  10. Modifying Searches • The VectorVest 7 contains more than 200 built-in searches. Any of these searches can be modified by changing or adding parameters and/or by changing the sort • For example, adding a Relative Safety parameter may help to reduce the Maximum Draw Down (MDD) and help to increase the % winners (in a bullish strategy) • An illustrative parameter: RS | => | 1.0

  11. Buy stocks that are ‘Rising in Price’ • A rising stock price can be uncovered by one of several crossover search parameters • Example:* * Requires Protrader

  12. Buy Stocks that arefrom ‘Rising Industries’ • A rising industry price can be ‘timed’ by using a trending search parameter: Industry Price | Trending | Daily[---++] • In this example, the industry price started trending up two days ago.

  13. Buy‘Undervalued’ Stocks • To discover ‘undervalued’ stocks, add a search parameter such as ‘Value > Price’ • Some traders* may be more restrictive by adding, say, ‘Value > 1.5*Price’ • Beware! This parameter doesn't improve Bottom Fishing searches, as value is already greater than price in all probability. * Value is a estimated number, which may be somewhat incorrect. So traders may make allowances.

  14. Buy Stocks ‘During a Rising Market’ • A rising overall market is normally signaled by one of four built-in timers: Confirmed Call, DEW, Primary Wave, or Green Light Buyer. • A custom timer using, say, a 20/40 MA crossover signal of the VVC may also be used • Sometimes a trader uses only a rising stock price as a signal. He may ignore overall market signals altogether (not recommended for beginners).

  15. Support/Resistance • Support/Resistance (S/R) concept asserts that price movement will tend to stop and reverse at certain predetermined price levels • S/R lines are useful in finding the most promising stocks via cherry-picking, using a stock graph (see later slides) • Successful traders avoid upward trending stocks approaching (from below) a recent resistance line or approaching a 52 week high, or vice versa in shorting situations.

  16. Campaigns vs. Forays • VectorVest uses the word ‘Campaign’ to mean a round-trip trading venture into the market and later out again. For example, trading throughout a period from a confirmed up signal to a confirmed down signal constitutes one campaign • Some users believe that the word ‘Campaign’ suggests a longer term activity than is present in most trends. They prefer the word ‘Foray’ • In this presentation, the VectorVest word ‘Campaign’ is used.

  17. Figures of Merit • Average Annual Rate of Return (AARR) • Compound Annual Growth Rate (CAGR) • S&P 500 comparison (a benchmark) • Maximum Drawdown (MDD) try to hold to < 20% • No. of trades and % winners • No. of campaigns and % campaign winners • Calmar Ratio compares the CAGR to MDD.

  18. S&P 500 Monthly Chartfor 10 Years S&P 500lost 22% over these 10 years? % in these 10 years

  19. Benchmarks • Wall Street pundits commonly use the S&P 500 as a benchmark for measuring general market action and performance • VectorVest uses its benchmark called VVC, a composite average of around 8000 stocks • During the same 10 years (2000-2010), VVC gained about 6% vs. a loss of 22% by S&P 500. • So, not all market benchmarks are the same or even similar (see next slide).

  20. VVC Weekly Price Curvefor 10 Years Four Major Trading Opportunities Leg 2 Leg 3 Leg 1 In this instance, these four trends occur over about 70% of the 10 year period Leg 4

  21. Making Moneyin Differing Market Conditions ForEducational Purposes Only

  22. Educational Studies • The following 4 studies are all conducted automatically using the VectorVest 7 back tester with Autotester and Protrader • Each leg is displayed on the preceding slide 20. No discretionary actions such as cherry-picking or other important, though manual, trading steps can be done in the automatic mode • Any VV 7 user can replicate these studies • The testing period dates are chosen to demon-strate high performances, that is, they are ‘showcased.’

  23. Bottom Fishing – Leg 4‘The Art of Buying Low and Selling High’ Seeking to FindApproach Explosive Growth Coming off Bottom Quality Stocks Use S&P 500 list Beaten Down Stocks Use Ascending RT

  24. BF (Cont) • When to Buy? Test Period: 3/09/09 to 1/4/2010 Market Timer -- DEW up Stock/Industry Timer -- none • What to Buy? S&P500/RT Search • Features: Uses good fundamentals stocks, replaces stopped out positions • Feature: Steps in 2 positions per trading day • Sort: RT ascending • Camps: Up only. No action otherwise • When to Sell? 50%G/10%L fixed stop (positions), orwhenDEWsignalsdown, discontinue replacing positions.

  25. SearchAggressive

  26. Bottom Fishing (Cont) • Results – Explosive! • AARR: 293% • CAGR: 343% • S&P: 79% • No. of Trades & %Winners: 9664% • No. of Campaigns & %Winners: 11 89% • Maximum drawdown: 14% • Calmar Ratio: 35 * Commissions included but not slippage

  27. Bottom FishingEquity Curve – Leg 4 Green and Red triangles are DEW up and down timing signals

  28. Stock Timing Enhancement • A stock timing parameter, 1-day MACD Crossover, added to the search, modifies the outcome. It reduces the maximum drawdown (MDD) and increases the % winners, although also reducing the AARR • AARR: 127% • Trade winners: 68% • No of campaigns 11 • MDD: 10% • Calmar ratio:15

  29. Stock Timing Search

  30. Stock TimingEquity Curve

  31. RS Study • As noted in slide 10, adding an RS parameter will generally reduce the MDD and increase %winners. It will also generally reduce profitability • This study adds RS | >= | 0.9 parameter Basic StudyRS Study AARR %: 313 98 CAGR %: 277 92 MDD %: 14 10 Calmar Ratio: 20 9 %Winners: 62 65

  32. Value Study • As noted in slide 10, adding a Value parameter generally reduces MDD and increases %winners • This study adds parameter: Value | >= | Price Basic StudyValue Study AARR %:293 107 CAGR %: 343 116 MDD %: 14 8 Calmar Ratio: 35 14 %Winners: 64 73

  33. What’s the Best Timer for BFs? TimerCAGR(%)MDD(%)Calmar Ratio C Call 324 14 24 DEW 343 1435 PW 219 14 16 GLB 70 6 13 Either the Confirmed Call or the DEW timer works well When in doubt, run comparative tests in out-of-sample periods.

  34. Optimization via Scientific Method • The past several slides (pertaining to Stock Timing, Value, Safety, and Market Timing) illustrate a well-known application of the scientific method • That is, one variable is tested while all others are held constant • Caution! Such optimizing may lead to curve fitting (see later slides).

  35. Notable Opportunity • BF strategies are probably the most profitable of all, so a trader should take full advantage of them • Major* BFs occur about 2 times per year, with the trends typically lasting about 4-6 weeks • The longest BF trend in recent times was 14 weeks • In addition, minor BFs occur fairly frequently. * A major BF starts after the MTI reverses from being near or below 0.6 and the BSR from being near or below 0.2.

  36. Shorting -- Legs 1 & 3‘Profiting during a Down Market’ Seeking to FindApproach Poor Stocks RV*EY Ascending Reduced Whipsaw Step in slowly Stability Use high Comfort Index & high Relative Safety

  37. Shorting • When to Buy? Test Period: Leg 1: 3/00/02 to 10/7/02 Leg 3: 6/11/08 to 3/26/09Market Timer: Confirmed Call (C/Dn) Stock Timer: MACD Crossover • What to Buy: Gravity II Mod (custom) • Features: MACD crosses down over its signal line in the last day; price greater than value; strong CI & RS; replace stopped out positions; step in 3 new positions/day • Sort: RV*EY Asc (Note: Weak value and earnings yld) • Campaigns: Down only. Go to cash otherwise • When to Sell: 30G/10L% (individual stock), orwhenC/Up, go to cash (entire portfolio).

  38. Shorting Search

  39. Shorting -- Leg 1 • Results • AARR: 27% • CAGR: 23% • Trade Winners: 53% • Maximum drawdown: 14% • Calmar ratio ~ 2 Commissions included but not corrected for slippage.

  40. Shorting -- Leg 3 • Results • AARR: 19% • CAGR: 19% • Trade Winners: 50% • Maximum drawdown: 12% • Calmar ratio ~2 Commissions included but not corrected for slippage.

  41. Shorting Equity Curve -- Leg 1 Shorting Search uses Red Triangle signals

  42. Why CI Indicator? • def: CI indicates a stock's ability to resist severe and/or lengthy price declines • A high CI parameter, in a search, can reduce drawdowns • See SOTW of 7/31/2009 for more CI details.

  43. Shorting Comment • If trading inside an IRA or 401(k), Contra ETFs will need to be employed to trade in down-turning markets.* These ETFs have a property of going up in value proportional to the market decrease. * A trader is not allowed to short inside an IRA or 401(k)

  44. Long – Leg 2‘Trading a Nice Uptrend’ • When? Test Period: 3/21/2003 to 7/12/2007 Market Timer: Confirmed Call Stock Timer: None • What? VST Newcomer with V>P (custom) • Feature: Parameter Value > Price • Feature: No Step In • Campaigns: Up only. Go to cash otherwise • When? REC <> Buy (individual stocks) or, when C/Dn(entire portfolio).

  45. Leg 2 (Cont)

  46. Leg 2 (Cont) Nice lower left to upper right curve. Note the flat spots when portfolio is in cash.

  47. Trending Long (Cont) • Results AARR: 75%* CAGR: 39% No. of Trade & %Winners: 257 48% No. of Campaigns & %Winners: 1580% Maximum drawdown: 19% Calmar Ratio: 2 Duration of trend over 51 months * Commissions included but not slippage

  48. Trending Long Conclusions • Most any trader should be pleased to have a strategy that produces such a high return, accompanied by tolerable maximum draw down, over such a long trend • Several other VST-based strategies are built-in to VV7 and may produce similar or possibly better results.

  49. Just-for-Fun Study • Here are cumulative ‘Just-for-Fun’ gains over the years 2000-2010. These gains arise by trading the prior four legs cumulatively. When not trading a strategy, portfolio is in cash LegOpeningClosing • Bearish $100,000 $168,767 • Long Trend 168,767 716,405 • Bearish 716,405 891,893 • Bot Fish 891,893 3,041,878

  50. Just-for-Fun* Study (Cont) • Gain: 304% • CAGR: 41% • Average** MDD: 15% • Calmar Ratio (Ten Years): 3 • Time in trades: ~70% * Called ‘Just-for-Fun’ because it would be highly unlikely that a trader would use these exact strategies. It is the author’s intent only to present a possible, though highly improbable, scenario. See later slides on subject of curve fitting ** An arithmetic average of the MDDs of the four legs

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