Technically Speaking, August, 2006

From the Editor’s Desk

As we prepare for the MTA’s Long-Range Planning Meeting to be held in September, we face a very fundamental question here at Technically Speaking – “What is our purpose?” This newsletter can serve many purposes:

Publish the original work of members and affiliates.
Reprint articles from other sources which contribute to the knowledge of our membership.
Disseminate news from the MTA.
Connect Regions by collecting news from their meetings. Meeting summaries share knowledge and news, and seem to be enjoyed by our readers.

In the past, we have attempted to do all these things, and in this issue we include information from each of these categories. But we have never learned what you, our readers, are actually expecting from us. Over the next month, please take a moment and send us your comments about what you think our purpose should be. You can e-mail me at editor@mta.org.

While thinking about that question, we hope you’ll enjoy the newsletter. On the cover, you noticed an interview with Welles Wilder, previously published in The Trader’s Journal. We have all seen Wilder’s work, and this interview offered us a chance to learn more about the technician behind RSI and other indicators. To me, the most interesting part of the interview is when he attributes his success to his ability to write advertising copy. What an interesting insight – no one knows how good you are until you tell them about your work.

We also have a software review, prepared by Matt Blackman, a frequent contributor to our newsletter who recently moved from affiliate to member status. Writing for us helped Matt
to become better known within the MTA, and made it easier for him to find sponsors. (That last sentence is my subtle monthly request for your contributions.)

You’ll also find an original study on seasonality by Frank Testa in this issue. Along with the list of Regions contacts and assorted news about our Association, it’s a typical newsletter. However, you have many choices of where to publish your work, and where to read about technical analysis. Maybe Technically Speaking no longer meets the needs of our members. Perhaps you’d rather a slimmer newsletter with only MTA news, or a longer newsletter with more current analysis. Unless you tell us what you’d like to see, we’ll continue delivering what we hope is a high-quality, must-read product every month.

Sincerely,

Mike Carr, CMT
Editor

What's Inside...

From the President’s Desk

Phil Roth, CMT

Greetings Members and Affiliates:

I trust everyone is taking some time off this summer to reinvigorate. I did. But the...

J. Welles Wilder

Stuart McPhee

interview they did with Welles Wilder. They have graciously allowed Technically Speaking to reprint a portion of their interview....

Stocks’ Seasonality

Frank E. Testa, CMT

The direction of the overall market has a paramount impact on the success of one’s investment approach. Wall Street recognizes...

“The Fusion Trader’s Secret Weapon” A Review of VectorVest Online Software

Matt Blackman, CMT

Traditionally, the gap between fundamental and technical traders/investors has been more gulf than line. Each group views the other with...

From the President’s Desk

Greetings Members and Affiliates:

I trust everyone is taking some time off this summer to reinvigorate. I did. But the MTA is a year-round operation, and our meetings and planning goes on.

Let me start off by reminding everyone about the MTA’s Long Term Planning meeting on September 9, 2006. The meeting will be held at the Doubletree Hotel at Newark Airport in New Jersey. The actual address is 1000 Spring Street in Elizabeth, New Jersey. We chose that hotel because it is very accessible for out-of-town members, just a few minutes from the airport. The MTA Board will be there en masse, as will most of the committee chairs. This is a great opportunity for you to meet the people who are responsible for running the MTA, both volunteers and staff, and to offer your opinions and suggestions about strategy, past, present, and future.

The Search Committee for an Executive Director has been meeting with candidates throughout the summer. We will have had second interviews with the most promising men and women by the end of August. The Committee’s goal is to have a new ED in place in the fall. As it turns out, we have found a number of qualified candidates with much experience in working with and leading not-for-profit organizations such as our association, as well as successful business executives from other fields. I am confident we will have a fine manager on board shortly.

The results of the CMT testing in the spring of 2006 are all in. For the first time, the level 1 and 2 tests were completely machine-gradable and the CMT 3 essay test was given on a computer. The vast majority of test-takers benefited from the computer-based tests, and certainly the graders of CMT 3 had a much easier job grading that test. In somewhat of a surprise to us, the pass rate for CMT 1 dropped a little, but the pass rates for CMT 2 and CMT 3 were solid. About three-quarters of the candidates passed CMT 2 and about two-thirds passed CMT 3. In the last three testing periods, spring 2005, fall 2005, and spring 2006, we had a total of 278 candidates pass CMT 3 and become eligible for their Chartered Market Technician designation. All full members of the MTA in good standing qualify for the designation after they have passed the three levels of tests. No doubt the fact that people who have passed the CMT 1 and CMT 2 tests (and holders of the CMT designation) can get an exemption for the NASD Series 86 examination has spurred interest in the CMT program. All the work and money the MTA expended in negotiating with the regulators is paying off. I, personally, and speaking for the MTA Board, am extremely gratified in the growth and success of the CMT program, and want to congratulate the new CMT’s. The MTA will continue to make time, effort, and resources available to maintain and improve the quality of the program.

Sincerely,

Phil Roth, CMT
President

Contributor(s)

Phil Roth, CMT

Philip J. Roth, who holds the Chartered Market Technician designation, was the Chief Technical Market Analyst at Miller Tabak + Co. from 2001 until April 2012. Phil was a Wall Street professional for 46 years, and has been in the industry for...

J. Welles Wilder

interview they did with Welles Wilder. They have graciously allowed Technically Speaking to reprint a portion of their interview. Please see their web site, www.traders-journal.com, for more information on this magazine.

Welles Wilder is best known for his technical indicators – now considered to be core indicators in technical analysis software. These include Average True Range, the Relative Strength Index, Directional Movement and the Parabolic Stop and Reverse.

He has written many articles on trading, appeared on numerous radio and television programs, and conducted technical trading seminars in Asia, Australia, Canada, USA, and Europe. He has also developed the Delta market timing software, One Day at a Time. Around the world, there are probably more traders using Mr. Wilder’s systems and methods than any other discipline.

Who is J. Welles Wilder ?

TJ: Please provide a background of yourself? What were you doing before you became a trader? When and how did you get into trading?

It just so happens that I have had several careers. Between high school and college, I was an automobile mechanic and joined the Navy and became an airplane mechanic. After the Navy, I went to North Carolina State College on the GI Bill and graduated with a degree in Mechanical Engineering. After seven years of engineering (and building a large mobile home park on the weekends) I left engineering and got into real estate and land development.

Two other people and I built 1,035 apartments in five cities in North Carolina and Virginia. I bought an airplane, learned how to fl y it, and made the rounds of the five projects about every day. When the apartments were almost finished my two partners wanted to buy my third of the projects.

In the mean time, I had become interested in trading commodities because they are even more highly leveraged than real estate. My partners and I agreed on a fair price and suddenly, at 38 years old, I had all the money I needed and nothing to do. So, I started to study the art of commodity trading.

TJ: What was it like when you first started?

I made a lot of money in Silver because I had reason to believe that Silver was going to increase in price. I can remember buying a contract of Silver at $1.38 an ounce. I think that was as low as it got.

TJ: How have you evolved as a trader?

I began to trade other commodities and I soon learned that one can also lose money trading commodities. So I stopped trading and began to get into technical analysis. This was in the early to mid seventies. The only book I could find in the library about trading was written by a man named Gold. Then I learned about a man in Wysetta, Minnesota who had collected about everything in print on technical trading. For a small price, he would send you several of his writings at a time and allowed one to copy them before sending them back.

TJ: How long did it take before you considered yourself successful? And how would you define success?

My first real success in the commodities industry was in 1978 when I wrote and self published my first book, New Concepts In Technical Trading Systems. Before I wrote that book, there were just two basic totally automatic trading systems to my knowledge. One was the moving average and the other was Richard Donchian’s weekly rule.

In the New Concepts book, I introduced four new automatic trading systems. They were, the Parabolic Time/Price System, the Volatility System (which introduces Average True Range) the Directional Movement System, and the Swing Index System. The book also includes the first momentum oscillator to put all commodities and Stocks on one scale. That was called the Relative Strength Index or better known as the RSI. Over the years, we have sold more than 25,000 copies worldwide. At $65.00 it was also one of the highest priced books on trading.

Upon completing the book I ran a full page ad and an article on the RSI in the June 1978 issue of what was then called Commodities Magazine. This was just at the time that small computers were becoming available and it seemed every trader in the world was looking for something to program. We sold thousands of copies of the New Concepts book to these people all over the world.

The result of this is that I suddenly became well known in about every country that has commodity and stock traders. In the meanwhile, I developed an (automatic) visual trading system called the Reverse Point Wave System. It worked equally well on stocks and commodities. To make a long story short, I put on seminars and taught this system to traders in about 10 different countries.

Probably, what contributed the most to my success over the years was my ability to write advertising copy. That is quite unusual for a Mechanical Engineer! I suppose that it was about this time that I considered myself successful in my third career.

So how would I define success? I would say; by setting oneself a difficult goal and then achieving it.

TJ: What is the largest contributor to your success?

Determination, and being one of the best ad copywriters in the industry.

TJ: What do you trade?

I trade the 35 major US commodities, primarily, and next; Gold and Silver stocks and options.

TJ: What was your best trade?

The one I remember the most was in the early seventies when I bought $10,000 worth of silver options and sold then for $40,000 six months later.

TJ: What was your worst trade?

Well, I hate to tell you this one. It proves that I’m not very smart after all. In the Spring of 1999, I thought that Y2K was going to be a problem. That was when my wife and I decided to live permanently at our home in New Zealand. I thought that if there were problems, then Gold would rise in price. So I bought 1600 gold options. About a week before we left for New Zealand, Gold began to rise rapidly.

When I got to New Zealand I realized that I had forgotten to take a new data disk. My office in North Carolina e-mailed me the value of my options every day. When they reached two million dollars, I decided to take profits. So I e-mailed my office manager to BUY 200 Gold options every day. What I meant to say was SELL 200 Gold options every day.

When I found out my mistake a week later, I almost fainted. I e-mailed him to SELL every option we had left the next day. To end this story quickly, (I don’t much want to think about it!) I ended up just about breaking even on the deal. That was certainly my worst trade; which could have been my best trade, except for one word: BUY!

TJ: What methodology do you use?

I use the best trading system I ever developed. It’s called the Delta Plus system. It makes over 100% a year, every year, trading eight commodities. It is available only to members of The Delta Society International. It uses, among other things the Volatility System and the Parabolic Time/Price System.

TJ: Is that what you do now – you have a newsletter and you manage money?

What I do now is head up an organization I initiated in 1984 called The Delta Society International. I write the monthly trading letter that members receive. I do not manage money (except for myself!) We don’t have space here to talk about The Delta Society. If interested, please check out our web site www.deltasociety.com

New Concepts in Technical Trading Systems

TJ: How did the book come about? Where did you get the inspiration and ideas for the book?

In the mid seventies, I had time to come up with a lot of new trading concepts. So, I decided to do something that I had never done…write a book about the best ones.

TJ: What is the central theme of the book?

Frankly, I don’t think there is one because each system has its own theme.

TJ: What makes it stand apart from other books?

I think it was the new concepts that were different from anything else in print that made it totally different from other books.

TJ: How could one get the most out of the book?

Read it slowly and carefully until you understand the concept for each system. And understand what serious system developers have learned…that the best system in the book (often overlooked) is the Volatility System concept.

TJ: Can we talk a little bit about the RSI ? What led you to develop the indicator?

Back then, people were using oscillators to show the strength and weakness of a particular stock or commodity and each oscillator had a different scale. The RSI put all commodities and stocks on the same scale from 1 to 100.

TJ: How?

Frankly, I can’t remember exactly how I did it. But, I could figure it out again, given enough time.

TJ: In basic terms, what sort of signal(s) does the RSI give?

In a nutshell, it measures the current strength and weakness of a particular market often in advance of the move. I don’t think we have the space here to cover it completely, but on page 68 it is laid out in detail, including one of the most important concepts: “The Failure Swing”.

TJ: Are the principles in the book still relevant in today’s market? What would you modify and add if you are to write an updated edition today?

The answer to the first question is definitely. For the second question, I can’t think of anything I would add or take away in the book. I admit that is quite unusual!

On Markets

TJ: How do you view the market?

The markets must win or else their will be no markets. There must be more money lost than won. The big winners are the Commercial Hedgers with huge money to back up their positions. These are the Fundamental Traders. The second group of traders is the Large Speculators which are mostly the big commodity funds. They are technical traders. The last group is the Small Trader. The Small Traders certainly outnumber the other two by I would guess a thousand to one. Since only 5% of Small Traders (over time) end up making a profit you can see where the money comes from to make a market. Fortunately, so far, I am still in the 5%!

TJ: How do you approach the market?

I have two accounts. In one account, I follow the Delta Plus System on the 8 commodities exactly, no matter what I think personally. In the second account I use the Delta Turning points and my own judgment to trade all of the market, but not necessarily at the same time!

I also have another system, called the DDS (Delta Directors System) that trades any and all commodities with only one parameter. (A parameter is a certain value or number that changes for every commodity.) This system has averaged over $50,000 a year in actual trading for the last 10 years. Nine out of the ten years were profitable. The one losing year was a loss of $5,000. The first quarter of the following year made over $20,000.

TJ: What has changed in the markets now from when you first started?

Since the markets must win, most trading systems can work fairly well for a year or two and they break down to losing as more and more sophisticated market action adapts to defeat the system. So what has changed is that the markets adapt to most every kind of trading system, and it becomes harder and harder to come up with a system that can beat the markets. But, a few of them do beat the markets year after year. The more commodities your system trades well and the fewer parameters it has, (no more than two at the most) the better and longer lasting is your system.

TJ: What has remained the same in the markets now compared to when you first started?

Not much except for the three classes of traders.

On Trading

TJ: Is trading difficult?

Well, it’s certainly not simple. Successfully trading commodities is the most difficult thing I can think of.

TJ: What are the difficulties?

Finding a good trading system and following it exactly.

TJ: What is the biggest cause of failure and how should people overcome it?

Letting your emotions override your plan or system.

TJ: Are traders born or can they be taught?

Both. Some people are born with an innate discipline. Most have to learn it the hard way.

TJ: What would make a good trade?

The trade should be in the major trend direction. It should not have wild gyrations. If possible there should be a nearby support area to provide a reasonable stop. It should be rated high on the COT. (Commitment of Traders.)

TJ: What would make a lousy trade?

It would be a trade against the major and minor trends with wild gyrations.

TJ: You’ve been trading for some time. I think one of the most difficult things traders are faced with is dealing with emotion. How do you avoid falling into the type of trap?

That’s a good question. It takes experience, discipline, quickly recognizing the problem and the determination to overcome it. Otherwise get out of trading.

TJ: What else should people keep in mind when they are managing risk?

Risk is something one should consider before entering the trade. He can use a chart to determine the support and resistance. If those allow too much risk, either forget the trade or come up with a dollar (amount of money) risk. Most importantly, do not increase the risk if the trade is going against you.

TJ: Given a chance to start all over again, what would you like to do differently?

Well, if I knew then what I know now, I would probably know Bill Gates and Warren Buffet as personal friends! Seriously though, as I look back on my life and think of how exciting and rewarding it has been, including the hard times and the good times, I wouldn’t change a thing!

TJ: Let’s talk about trading education. How long do you think it would take someone to master the art of trading?

Of course that depends to a great extent on the person and his mastering of the attributes we have been talking about. Most traders never master the “art of trading,” because to me that implies being able to trade profitably without a system to rely on. So, I don’t think I have a definitive answer to that.

Recommendations

TJ: What books would you recommend to our readers?

To tell you the truth, there are no so many books out on technical trading, I have not been able to keep up with any of then. However, I have a lot of respect for any books written by Tom DeMark. Look him up on Google.

TJ: Do you have any final comments you’d like to share?

I really enjoyed writing this. Your questions were very well put and covered about everything that one would want to know about trading. I hope that my answers have been beneficial to your readers.

I am over 70 years old and my abilities to do what I have done all my life are not as sharp as they used to be. Over the years, I have written three books on technical trading and trading systems and one book with the modest title of “The Wisdom of the Ages in Acquiring Wealth”.

If I had only known in my youth what is in this book, I would be much wealthier than I am now. The book is all conversation between the teacher, Mr. Richmond, and the students. I would urge you to get a copy from Amazon. Read it yourself and then have all your children read it.

In closing, here is something kind of interesting. My name is spelled Welles Wilder. The only other person who I have found that spells Welles with two e’s is Orson Welles. So if you look me up on Google as Welles Wilder you will get so many hits. However, if you look up Wells Wilder you will get three times as many hits. The bottom line is that three fourths of the people that make reference to me don’t even know how to spell my name!

Well, I really appreciate your insight and thank you for your time.

Contributor(s)

Stuart McPhee

Editor of The Trader’s Journal.

Stocks’ Seasonality

The direction of the overall market has a paramount impact on the success of one’s investment approach. Wall Street recognizes the importance of the overall health of the market through the adage “A rising tide lifts all boats” – meaning the probability of selecting stocks that will rise is enhanced by investing in a market that is in the midst of an uptrend.

Virtually all markets experience seasonal patterns, thus the astute investor can position his/ her portfolio in sync with the cyclicality of various financial instruments. For instance, copper has a strong seasonal uptrend from the January/February period with a tendency to top in March or April. Treasury Bond prices are usually weaker during the first half of the year and stronger during the second half. Likewise, stocks enjoy periods of particularly strong performances throughout the 12-month time frame.

Most people are familiar with the January barometer that holds “as January goes, so goes the year.” According to this barometer, how the S&P 500 performs during January will determine what kind of year the market as a whole will have. A well known cycle is the Presidential Cycle that breaks down the performance of the stock market based on the four years of the Presidency. The election year (1) is normally strong. The post election and mid-years (2 and 3) are normally weak, while the pre-election year (4) is normally strong. Perhaps this cycle is influenced by the incumbent’s efforts to jump-start the economy to strengthen his chances for re-election.

While stocks drift in continuous waves ranging from intraday to yearly, our focus will be on two 6-month periods. The first period depicts the performance of the broad-based indices during the October 31st through April 30th period, while the second period will illustrate the performance of the indices spanning the April 30th through October 31st time frame. Our study will encompass the performance of the S&P 500, Dow Jones Industrial Average (DJIA), and Nasdaq Composite for the past twenty-five years.

The results are nothing short of extraordinary across the board as the performance of the major indices during period 1 (October 31st through April 30th) shatters the results of period 2 (April 30th through October 31st).

The table below depicts the growth of a $100 investment in the S&P 500 Index, Nasdaq Composite Index, and Dow Jones Industrial Average. The results do not include tax considerations and dividends.

Period 1 = October 31 through April 30
Period 2 = April 30 through October 31

Profit Opportunities:

Armed with the knowledge that period 1 outperforms period 2, an investor could elect to purchase the Diamonds (DIA) as a proxy for the Dow Jones Industrial Average on October 31st and look to rotate into cash by April 30th. Likewise, an investor, seeking to replicate the performance of the S&P 500 Index, would be well advised to purchase the S&P Spiders (SPY) during period 1 and liquidating the position by the beginning of period 2. Lastly, an investor seeking to mimic the performance of the Nasdaq Composite Index could utilize the Nasdaq 100 Trust Shares (QQQQ).

Contributor(s)

Frank E. Testa, CMT

Frank E. Testa, CMT is the Chief Technical Analyst and Vice President at CapitalBridge and has more than 20 years of investment experience. He has developed the Power Point and Figure Charting Method that appeared in the 2005 edition of The Journal...

“The Fusion Trader’s Secret Weapon” A Review of VectorVest Online Software

Traditionally, the gap between fundamental and technical traders/investors has been more gulf than line. Each group views the other with skepticism more akin to enemy troops rather than members of the same profession.

Technical analysts believe that all they need to know about a stock can be found in its price chart. By the time the market knows about key fundamentals, they have already been priced into the stock. One only has to look at the approach of a value or buy-and-hold investor for an example of this, they claim. A value investor buys stocks when the price drops since the cheaper the price, the greater the value. This approach with stocks like Enron and WorldCom resulted in colossal losses for those who used it.

Fundamental analysts, on the other hand, charge their technical counterparts with using past data to make future stock buying and selling decisions. Such an approach, they claim, is tantamount to driving along the freeway relying only on what you see in the rear-view mirror.

But there is a third group that effectively combines both techniques – the fusion trader. The efficient market hypothesis postulates that the desires, wishes, fear and greed of all players is immediately priced into a stock, but it effectively ignores existing and longer-term or non-immediate sentiment.

Let me explain. In a bear market, investors discount good news and react to the bad – in other words good news, bad action (or reaction). In bull markets the opposite occurs. At such times, stocks remain unrealistically priced for extended periods.
As one market guru once quipped, the market can remain irrational much longer than someone on the wrong side of it can remain solvent. How efficient is that?

If the efficient market hypothesis were true, great traders like T. Boone Pickens, Steve Cohen, Paul Tudor Jones and Dan Zanger (to name but a few) would not make as much money as they do. Those at the top of their game win consistently by looking at the market in a different way than the majority. The very best traders are masters of the technical and fundamental. They utilize statistics, quantitative analysis and rely on a variety of factors from macro-economic to micro-technical. In short, the fusion traders use whatever works and do not limit themselves to any single field of market study.

So why are there so few stock charting and analysis programs that do an effective job of handling fundamentals and technicals together? Most utilize one technique thereby requiring the trader/investor to master a number of programs. But is this absolutely necessary?

Advertised as a program that does an excellent job in addressing the above challenges, does VectorVest live up to expectation?

Manufacturer – VectorVest, Inc., 20472 Chartwell Center Dr. Suite D, Cornelius, NC, 28031, USA

Phone – 1-888-658-7638 or 1-705-895-4095

Web Site – http://www.vectorvest.com

Version Tested – VectorVest Online Software Version Release 1.3.8. (Online version only.)

Cost – Subscription based. $645 USD/year U.S. version. $545 USD/year Canadian version. Both, $745 USD/year.

Recommended System Requirements

A PC-compatible computer.
Windows 98, NT 4.0 (SP6 or higher), 2000, Millennium or XP.
A minimum 300 MHz processor, 500 MHz. or higher preferable.
A minimum of 64 MB of RAM, 128 MB recommended.
Requires 200 MB of hard disk space.
Internet Access with 56k Modem or faster. (DSL/Cable Modem recommended)
Monitor and video card supporting 800×600 or higher resolution.
Internet Explorer 5.5 (or higher) or other browser with ActiveX capability.

Machines used in testing – 1) Desktop – MS Windows 2000, 1 Gigabyte RAM, 2.4 MHz. 80 Gig HD. 2) Laptop- MS Windows XP Pro, 1 Gigabyte RAM, 3.2 MHz. 80 Gig HD.

Connection – Internet via broadband high-speed cable. Also accessed from laptop while travelling from dial-up modem at speeds ranging from 33 to 56 kbps and found it acceptable.

Getting Up and Running

When you receive the package containing the VectorVest manual, installation CD and two-day seminar training CDs, follow the directions in the VectorVest Quick Start Guide. Install time will depend on computer speed but took less than 20 minutes with the subject computers. Users had access to 8,053 U.S. stocks and 2,434 Canadian stocks (VectorVest Canada) at time of test in May 2006. It is recommended that you listen to the two-day seminar to get up to speed to take advantage of the greatest number of program features from the start.

Viewing Charts

Viewing charts in the program is easy. Open VectorVest, type the stock symbol(s) you wish to view in the Quick Lookup window and click either the Details, Report or Graph buttons. The Details window provides a quick snapshot of stock fundamentals such as Price/Earnings, Dividend Yield, Annual Sales and Market Cap as well as a number of VectorVest indicator values. Market technical details such as daily and average volume, opening and closing price, etc. are also displayed.

The Report window, provides an extensive overview of the company including Business, Sector and Group together with full explanations of the VectorVest indicators such as Relative Value, Relative Safety, Relative Timing and the VST, plus the VectorVest stock recommendation (Buy, Sell or Hold), Earnings per Share and a host of other fundamental ratios and numbers useful in assessing the stock’s true value.

The Graph window offers a host of options (please see right-hand side of chart in Figure 1). They include the Standard (bars) and ProTrader (candlesticks) chart options, depending on what format you prefer. Standard charts provide a more fundamental view while ProTrader charts offer a more technical chart view and include a number of useful technical indicators. Using the text box or text balloon functions, it is easy to add notes to charts to include comments on fundamental ratios, indicators and other useful information.

Currently, the program provides end-of-day data only, but there are plans for an intraday version in the works. Since this is an online version, there is no need to download and update data on your computer. It is done automatically on the site.

Figure 1 – Weekly VectorVest chart showing the VectorVest Composite Index (VVC) of all 8,034 stocks so it presents a more accurate indication of the market than the Dow Jones Industrial Average or other index with a limited number of issues. The blue line in the upper subgraph is the current value of the index and is computed from forecasted earnings per share, forecasted earnings growth, profitability, as well as rates of interest and inflation. The lower subgraph is the VectorVest Relative Timing Indicator. Note that when value drops below price, a correction generally ensues; when value rises above price, price eventually moves up. (Chart provided by www.VectorVest. com.)

VectorVest’s USP (unique selling proposition) is the way the user can evaluate stock fundamentals in both graphical and full text report format quickly and easily. Investors and technical traders will appreciate the way that the fundamentals such as stock value, price/earnings and other ratios etc. are displayed graphically for rapid evaluation.

VectorVest proprietary indicators such as the VST, Relative Timing, Relative Safety and the Comfort Index are effective in helping to choose winning stocks. They allow searches for stocks that are rebounding after a price retracement or those that are safer bets with lower volatility. Users can also scan for divergences between stock price and the Relative Timing indicator to warn of potential impending changes in trend at the top and bottom of moves. It is worth taking the time to become familiar with these indicators for new users.

Figure 2 – Weekly chart of the VectorVest Composite (VVC) showing composite earnings growth (GRT) and Sales Growth (Sales GRT) from 1996 to present. Besides these two, other indicators that can be included in the lower subgraph include corporate sales, volume, average volume, price/earnings ratio, market cap (MC), dividend yield (DIV), growth/price/earnings (GPE), which is similar to the Price Earnings Growth (PEG) ratio, as well as a number of proprietary VectorVest fundamental and technical indicators. Chart provided by www.VectorVest.com.

VectorVest Tools

Market Views – Not only can users look at stocks (Stock Viewer), there is the ability to take a look at the industry (Industry Viewer), sector (Sector Viewer), industry as well as details and charts of all three.

Performance Graph – Allows comparison between stocks, between a stock and an index, stocks and their industry, stocks and sector comparison or any combination of the above.

Market Timing Graph – Allows an examination of underlying market direction to evaluate market strength using a combination of the VectorVest Composite, VectorVest Value and the Market Timing Indicator. This is a useful tool in examining market breadth as well since it provides an instant snapshot of the buy/sell ratio or number of stocks with Buy, Sell and Hold recommendations in the VectorVest universe of more than 8,000 stocks (2,400 in the Canadian version).

VectorVest Views – Daily and weekly market commentaries on overall market strength, the VectorVest Composite (VVC) to examine market direction and strength, Market Timing Indicator (MTI) to determine whether the overall market is in buy or sell mode and a recommended stock trading strategy for the week.

UniSearch – This is one of the most powerful features of the program. It allows users to choose from a list of pre-designed stock scanners or design their own to search for stocks meeting a complex array of technical and/or fundamental conditions. Screens can be set up to display search results in a variety of sorts such as highest to lowest Value, Price/Value, VST, Relative Safety, Relative Timing, volume, rate of change or a host of other parameters.

For example, investors employing the CANSLIM approach (formula developed by William O’Neill), can scan for stocks with Current quarterly earnings growth of a minimum 18%, Annual earnings growth minimum of 25%, New highs, Supply of shares below 100 million shares, Leader of its industry or sector, with Institutional buying and where the Market is heading higher.

Options Pricing Model – Also included is the Black-Scholes Option Pricing Model to calculate theoretical values for American style options. There is also an Options Rate of Return tool calculator included.

Portfolio Management – VectorVest provides functionality that allows investors to create a list of stocks in a portfolio and follow them as often as they like. Stocks can also be back-tested using a variety of trading strategies to see how the strategies perform over time and compare the returns to the VectorVest Composite index. The user can also create his or her own stock watch lists and update the list as new stocks meeting specific criteria are found.

Conclusion

There are a number of online and computerized stock screeners on the market today. The challenge is that most concentrate on either fundamentals or technicals; few do an adequate job of integrating the two together for the new breed of fusion trader or investor.

VectorVest combines fundamental and technical search parameters in a fashion that allows the user to narrow his or her search so that only stocks meeting the complex combination of fundamental and technical criteria are produced. On top of well-known performance ratios, the program provides some very useful proprietary indicators to help streamline the process.

VectorVest is not perfect. Since it is a web-based program, it can be slower than a machine-based program, and the speed at which it moves will depend on the speed of your Internet connection. Another challenge with the program is that there are so many functions and possibilities available, it can seem daunting to the new user. It is not for the faint of heart or uncommitted market player. But from this author’s perspective, such shortfalls were far outweighed by the program’s benefits.

In short, this reviewer has yet to find a program that is as effective in finding stocks that meet a complex array of technical and fundamental conditions. It performed well in finding stocks that had the potential to outperform in bull markets as well as the weakest candidates in bear markets.

VectorVest is a useful tool for the fusion trader or investor. Like all great players before them, the best of tomorrow will be those who realize that the key to success in the market is finding and using anything that works in keeping them one step ahead of the competition.

Contributor(s)

Matt Blackman, CMT

Matt Blackman is a technical trader, author, reviewer, keynote speaker and regular contributor to a number of trading publications including Stocks & Commodities, Active Trader, Trader Monthly, SFO mag and Traders Mag Europe as well as investment/trading websites in North America and...