Market Watch

Primary Trend Still Up, BPI on Defense

Download pdf version – Market Watch – March 21, 2021 – Primary Trend Still Up, BPI on Defense


“Markets change minute by minute – Human nature barely changes millennium-by-millennium. There’s your edge.” – Jim O’Shaughnessy


Bottom Line: There is enough information flow to choke a cow in this day and age. Under the current times, government lockdowns have people more focused on the internet and sadly, television media. It can all become a little much, and it heightens feelings of uncertainty in people about investing and everything else.

Our Market Watch is designed to give investors as much information as they want, but to keep it simple enough for those that don’t want a lot of information.

The bottom line is that we are on the job systematically taking advantage of opportunity and managing risk with a portfolio designed for your goals.

Our Buying Power Indicator remains negative so we are taking a defensive stance to our positions but corrections in markets are normal and should be welcome. However, the bigger picture stock market regime is still bullish.


In the Markets

We continue to believe that there is a major cyclical and economic recovery underway but right now, stock markets are listless. I don’t see that negatively as tight ranges mostly signal that there’s balanced buying and selling. More often than not, tight ranges are also a sign that the market is building up energy for another move.

The economy is moving from a pandemic to a recovery-type economy – since those two are vastly different environments the prevailing stock winners will be different in each one. It’s happened many times and I think this is, in part, what is causing the market chop. Study the past so you’ll profit in the future.

Below we use the Nasdaq 100 index to demonstrate what is happening. I believe odds are that this will be a bit like last summer, when the market went back and forth for a bit, building energy for the next move, even if it chops lower first. Though it doesn’t matter what I think, the weight of evidence supports that supposition. More below.  Click on chart to enlarge it.


Expectations vs. Reality

Our portfolios are doing fine, chopping about a bit this month, but in digging through some old files, I thought it might be good to bring this one out.

Of course, we have varying models and for our senior clients, our process is more focused on defensive strategies and positions than for those clients who have given us a mandate for growth.

In stock markets though, investors should not underestimate the path to achieving growth. Some investors always end up disappointed because they have a bad habit of having unrealistic expectations.

In Our Portfolios

We are trend followers who invest in stocks of companies that are either value stocks relative to earnings or companies that are generating strong trends in sales and earnings. They must have favourable chart attributes according to our technical process.

We will hold up to a target of 20-25 positions over time, as market conditions dictate and will balance the portfolio between growth and cyclical stocks. We are looking to maximize risk adjusted returns and our goal is to find high win potential ideas over an intermediate to longer-term time frame. This means when positions start to work and go into an uptrend, we will often hold them for an extended period, while possibly scaling gains on the way up.

As a result, when conditions are bullish, we may not have as much turnover, but when conditions deteriorate, like recently we may see more new positions our stops get tighter on open positions.

Every open position will have stop orders, which we raise as a stock climbs, and are established depending on the company type, the chart, and the market regime.

Our strategy and allocations adapt to the Market Regime.

We will be fully invested when our Primary Trend Indicator (PTI) and our Buying Power Indicator (BPI) are bullish. Our BPI tends to lead our PTI at market turns. As such, if the BPI turns negative, we will immediately target 20% of the portfolio moved to cash or short-term bonds awaiting for a return back to a positive reading.

If that does not happen, our PTI will be deteriorating, some of its components will have turned negative and we will probably have been stopped out of more positions without finding favorable charts. At that time, we will target higher percentage in defensive assets. If the PTI does turn bearish, we will be heavily exposed to cash bonds or other defensive assets, to the tune of 60% – 80%.


Buying Power Indictor

Money Flow Analysis, as measured by our Buying Power Indicator, is the most important first step in analyzing any security because it will give a leading tell whether the stock is under accumulation (demand) or distribution (supply).

The easiest way to explain Money Flow is through the word “liquidity”. Money Flow is basically observing every stock in the market and where it closes everyday versus its daily arithmetic mean of price, multiplied by volume: This, captures Money Flowing in and out of securities.

We measure the Money Flow for all stocks across all markets and create our Buying Power Model for every index. When a majority of stocks in an index are in distribution, our Buying Power Model gives us a signal to go on defence. As mentioned above, at those times, we tighten up our stop losses, and target roughly 20% in cash, short term bonds or other defensive assets until such time as Buying Power again turns positive.

If the Buying Power Indicator does not turn positive, then we would expect our Primary Trend Indicator to break down as well.


Primary Trend Indicator

Our Primary Trend Indicator (PTI) is really a composite of active trend and participation indicators, each of which is a signal of supply or demand in the market. Weighted, rolled together, and extensively tested our PTI does a good job of keeping us on the right side of the market’s primary trend.

The goal is to develop a logical and reliable model that captures major moves in the stock market and will continue to capture these moves. We are not talking pullbacks, corrections in bull markets, or for that matter, bounces in bear markets. Instead, we are talking bull and bear markets that affect the vast majority of stocks. The BIG trend or the market regime, as it also called.


Our Breadth Thrust Model is a more sensitive, or early warning component in our PTI.

The Breadth Thrust Model uses three breadth indicators designed to capture major shifts in short-term trend participation and quantifies advance/decline thrusts.

This too, shown below, remains in bullish mode.




We follow trends and manage risk according to the mandate each of you give us.

As I said last week, I think there will be more opportunity to create wealth in the next ten years than in the last fifty years combined, as we transition from an economy based on access to limited resources to one enhanced by mastering informational technology.

We also know that some clients do not care about ten years from now and we’ve built our portfolios for you accordingly. However, any investor seeking growth above the risk-free rate of return must accept some ups and downs along the way.

We believe our portfolios are the optimal strategy for taking advantage of opportunity, but still protecting in bear markets.

Currently, we are in a bull market, but buying power is weak. As such we’ve reduced our exposure to stocks somewhat and will keep our stops tight.

We will monitor our PTI for early signs of stock market trend deterioration, but for now I expect this will be chop in a continued bull market. That is what the evidence is saying currently.

These updates are designed to share our observations and tactics but may contain more information than the average investor cares to know.

The bottom line is that we are continually working on your behalf, in an effort to make sure your portfolios benefit from change, rather than falling victim to it. We believe our systems for doing that are among the best available and that our strategies, tactics and tools will help us to successfully navigate whatever happens as we focus on monitoring supply and demand signals that the market provides us.

If you would like further details on anything in this update, or have questions about anything else please do not hesitate to reach out.


Peter Schenk, CMT, CIM | Portfolio Manager



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