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Proprietary Analytics

Produced & Published by

Portfolio Research Partners

There is no crystal ball for forecasting market movements. However, Portfolio Research Partners has developed a suite of analytic tools that when used together can provide guidance as to broad market trends and help to spot profit opportunities in the US equity markets.

What Causes Asset Prices to Change

What really determines the price of an asset? There is only one true determining factor and that is the ratio of demand for the asset versus the supply available for sale. This is fairly straight forward, while extremely complex. There are many forces that affect the supply and demand ratio. The main influencing factors are the human emotions of greed and fear. These two emotions drive the dynamics that determine whether greed creates demand and asset prices increase or investors become fearful and supply outstrips demand and prices fall.

If these dynamics can be quantified, measured and understood, then the risk of investing declines and portfolio returns increase.

That is exactly what Portfolio Research Partner has accomplished with its suite of analytic tool.

Transactional Analytics

Directional Oscillator (“DO”)

The DO is a tool that measures the supply and demand for an asset. The indicator oscillates above and below an equilibrium line. At equilibrium, the supply and demand of the price of an asset are in balance. When demand is higher than supply, the DO Signal Line will move above the equilibrium line. When supply is greater than demand, the line will be below equilibrium.

When the indicator is above the equilibrium this indicates that there is more demand than supply (bullish) and when the indicator is below the line there is more supply and thus selling pressure.

Demand

Supply

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This indicator is very useful in spotting counter trend points. The steep spikes and troughs, especially at extreme points indicate a possible trend reversal. One should watch for the Confirmation Line crossing over the signal line thereby confirming a trend change. This provides higher confidence that a new directional trend is emerging.

In Wyckoff terms this measures the key events associated with Accumulation and Distribution and the Buying and Selling Climax that precedes a directional change in asset prices.

The Directional Oscillator is also useful in helping to confirm continuing trends. When the DO Signal and Conformation Lines move in parallel, this is indicative of the current directional trend remaining intact.

It should be noted that the equilibrium line serves as a primary point of support and resistance. This is consistent with the Wyckoff concept of a trend testing its directional move at some point in the cycle. Wyckoff termed it “Crossing the Creek”, where there are significant cross currents which may or may not disrupt the current price trend. This is also referred to as re-accumulation or re-distribution in the case of an up-trend or down-trend respectively.

The Directional Oscillator will always signal momentum trend turning points, but it also can generate false positives as well. Therefore it should be used as an initial signal that a trend change may occur. The Momentum Trend Indicator should be used for further confirmation.

The Directional Oscillator can be applied to any index or traded security.

Momentum Trend Indicator (“MTI”)

The MTI is designed to monitor the directional trend movement and strength as asset prices progress in the Mark-up and Mark-down phases of the Wyckoff Idealized Cycle. This indicator is used to maintain positions in assets through the use of simple trend lines marked along the conformation line. Once the trend line is breached this likely represents the beginning of the counter trend forming.

This indicator has a correlation coefficient of approximately +.95 to any asset price series it may be applied to, which indicates a positive, highly predictive relationship. Any correlation over +.80 is considered statistically significant. A perfect positive correlation is +1.0.

This tool can be used for any index or traded security.

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When used in conjunction with the Directional Oscillator, these two analytic tools provide the basis for determining when a directional shift may be occurring, the emerging new trend and a method to monitor the trend during is cycle.

By using the suite of proprietary analytic tools, Portfolio Research Partners, LLC helps their Subscribers anticipate and prepare for major shifts in the markets and to not only preserve capital during these periods but to be strategically positioned to benefit from sustained bull markets and preserve capital and profit in down markets.

For example, the stars on the Directional Oscillator and Momentum Trend Indicator graph shown above correspond with signal and confirmation dates for momentum shifts in late 2014. Here is what happened:

As you can see, using these two analytic tools can provide a sense of direction for the overall market trend.

In fact these were just four of the ten signals these tools generated throughout 2014. In total our analytic tools captured momentum turns for five cycles of up and down in the S&P500 index for a total volatility of 1210 points.

You are now asking; Okay, so what!

- For conservative investors knowing when to deploy incremental capital into the market is one reason this is useful. You want to invest when prices are down not up.

- Another reason this is a big deal, is that you can avoid some of the negative effect that draw-downs in markets can have on your portfolio returns. For example during 2014 the S&P500 index gained 12.4% (excluding dividends). If you had avoided the corrections, your portfolio would have gained 39.6%. Three times the performance.

- Some of our Subscribers use these tools to hedge their long positions since they don’t want to actively trade in and out of the market. A very simple technique that works great with these analytics is “Covered Call Writing”. Subscribers will be long the market using an Exchange Traded Fund tracking the S&P500. When a correction signal is generated by our analytics, they sell call options on their long position, using a near dated contract (less than 30 days) and an at the money or slightly in the money strike price. Our Subscriber collects the amount the calls were sold for. If the market corrects as anticipated and the price of the ETF in their portfolio falls below the strike price of the option contract sold, then the Subscriber also keeps the securities the covered calls were sold on. Most Subscribers then use the cash collected from selling calls to invest in more of the ETF they hold for their long position, thereby compounding their returns.

- More aggressive Subscribers may actually short the market and make money as the market falls, as many did during the October 2014 correction.

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No matter how you use the information, knowing where the market is and where it is going is a benefit in so many ways.

As you can see the Directional Oscillator and Momentum Trend Indicator are essential components of our market analysis, but there is much more fire power!

Market Analytics

We have developed five other proprietary tools specifically designed to determine the status and direction of the US equity market.

• Market Cycle Indicator • Mean Reversion Indicator • Bond Correlation Index • Volatility Divergence Indicator • Relational Volatility Indicator

These tools have proven predictive capabilities and are all highly correlated to the price movements of the S&P500 index. They form the basis for all analysis performed by Portfolio Research Partners, LLC.

Market Cycle Indicator (“MCI”)

The MCI quantifies the cycle for the broad US equity market and clearly shows the intermediate trend and turning points. This proprietary indicator uses a combination of closing prices from the S&P 500 index combined with relative timing and investor sentiment data to construct an index that can be used to understand the state of the current market cycle and spot trend turning points.

This indicator is designed to illustrate the broad market cycles and key turning points. Since a significant portion of the analysis is based on index price, this index is suited to trend line analysis.

Broad market tops and troughs are easy to spot and action should be considered as markets move toward extreme points. Action should also be taken when confirmed trends shift occur. Confirmation occurs when the confirmation line crosses the signal line and they begin to move in parallel.

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As can be seen when the MCI is plotted against the S&P500 Index, the MCI trend changes tend to precede the change in the Index trend. Divergences clearly illustrate overbought and over sold conditions that usually precede trend changes as well.

This indicator has a correlation coefficient of approximately +.87 to the S&P 500 index, which indicates a positive, highly predictive relationship. Any correlation over +.80 is considered statistically significant.

The Directional Oscillator and Momentum Trend Indicator can be applied to this as well as any traded index or security for advanced signals on when directional trends may be about to change. See the signals from these two proprietary indicators noted on the MCI.

Once an investor understands the primary trend of the market, then all other investment decisions can be made with more conviction.

Mean Reversion Index (“MRI”)

As asset prices traverse the trading range and emotions take control, prices always move into excess conditions. A staple of technical analysis has been to study price relationships in relation to various moving averages.

Portfolio Research Partners, LLC has developed a proprietary indicator that combines three key moving average variances to the S&P 500 price index. This indicator then uses an algorithm that smoothes the result and produces a tool that has a high correlation coefficient to the S&P 500 and which is greater than the correlation of any of the individual moving averages (50, 100 & 200 DMA).

This indicator has a correlation coefficient of approximately +.87 to the S&P 500 index, which indicates a positive, highly predictive relationship. Any correlation over +.80 is considered statistically significant.

When displayed with the SP500 index plotted against the Mean Reversion Index, the extreme points of divergence can easily be seen. Clearly when prices move too far in either direction, a return to the mean will eventually occur.

Mean Reversion Indicator Published by

Portfolio Research Partners, LLC Analytics used under license agreement with Sea Breeze Analytics, Inc.

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This indicator is an excellent confirming tool for higher convection of directional changes in markets and the continuation of broad trends in the market(s).

Bond Price Correlation Index (“BCI”)

All markets are interrelated. When some go up, others go down. When some markets move in a certain direction it confirms and supports other markets moves in certain directions. The most important market is the fixed income or bond market.

The Treasuries markets tend to be inversely correlated with the equities markets. In times of fear and panic money flows to the safety of the US government. In times of greed the liquidation of Treasuries fuels the rise in equity prices.

The corporate bond market tends to be directly correlated to the equities market, especially the high yield segment.

The convention wisdom is that the bond markets usually predict trends and trend changes in the stock market correct and in advance of the equity markets. This is because the bond market is much larger than the equity markets. Just using the US corporate bond market as an example, it is 76% larger than the capitalization of the US equity markets. If the bond market gets it wrong, the stakes are much higher.

Portfolio Research Partners, LLC has developed the Bond Price Correlation Index. This Index is constructed using input from corporate debt price changes including both investment grade and high yield bonds. It also includes on an inverse basis the prices changes for 10 year Treasury Notes and 30 year Bond.

Because the bond managers are quick to get out and slow to return; this Index is highly predictive of pending downtrends in equity markets and is extremely useful as a confirmation tool for upturns in the markets.

It should be noted that the shape of the curve will reflect the trend of bond prices. What we look for are the incremental changes to predict momentum shifts in equity markets.

Bond Correlation Index Published by

Portfolio Research Partners, LLC Analytics used under license agreement with Sea Breeze Analytics, Inc.

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This indicator has a correlation coefficient of over +.92 to the S&P 500 index, which indicates a positive, highly predictive relationship. Any correlation over +.80 is considered statistically significant.

Volatility Divergence Indicator (“VDI”)

The Volatility Index is a great predictor of the market trend and the strength of that trend. As the broad equity markets rise, investor confidence increases and fear declines. This causes the Volatility Index (VIX) to decrease, which means there is typically an inverse relationship between the direction of the equity market and the VIX.

The VIX also has a much greater velocity in its movement than the broad market indexes. During periods just preceding and during the early period of a directional shift in markets the velocity of the VIX usually increases greatly. Further the trend of the VIX tends to change in advance of the market’s direction.

The Volatility Divergence Indicator is designed to measure the relationship between the inverse VIX ETF; XIV and the ETF which mimics the SP500 index; SPY.

As can be seen in the graph, during periods when markets are trend in a particular direction, the trend line and confirmation line move in sync. But directional shifts create dramatic peaks and valleys. Again we have indicated the points where this analytic generated signals for the four trend changes in late 2014.

This indicator has a correlation coefficient of approximately +.95 to any asset price series it may be applied to, which indicates a positive, highly predictive relationship. Any correlation over +.80 is considered statistically significant. A perfect positive correlation is +1.0.

Relational Volatility Indicator (“RDI”)

One final clue as to the markets current state and future direction can be gained through a study of the futures contract activity for the long or short of the Volatility Index. These futures contracts are traded for the VIX index months into the future. The relationship between the Bull & Bear bets traders are placing for this index is highly predictive for the future direction of equity markets.

Volatility Divergence Indicator Published by

Portfolio Research Partners, LLC Analytics used under license with Sea Breeze Analytics, Inc.

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As these two dynamics play out against one another, it becomes very easy to see the inflection points for market moves as well as when momentum trends continue.

For example, the green arrow is pointing to the noticeable trough in the RVI as of October 16, 2014. This signaled the bottom of a market correction and the beginning of 12% increase in the SP500 index. The red arrow is pointing to the noticeable spike that occurred on December 12, 2014 which occurred just before a significant correction began in the US equity markets.

This indicator will always signal when a major directional change will occur, since the VIX market is directly tied to the direction and strength of the equity markets.

Suite of Analytic Tools

All of the analytics used in our analysis of markets and asset prices are highly effective in predicting trends and trend changes. However, when they are used together as a suite of tools, the analysis of markets and when changes may be about to occur become very accurate and reliable. This gives our subscribers the confidence to profit from our recommendations.

Using the example of the four trend changes in late 2014, here are when the analytics generated a change signal and the advance warning they provided our Subscribers.

As you can see, our analytics provided Subscribers advance notice of a change coming either in advance or at the point of change so positions could be adjusted accordingly. In reality though, any trend change can be seen in the making since each analytic has two components. So for market calls there are actually fourteen signals that begin firing and the progression to a full actionable signal can be seen forming days and weeks in advance. This enables our Subscribers to always know where the market is and where it is going so they can make profitable investing decisions.

Relational Volatility Indicator Published by

Portfolio Research Partners, LLC Analytics used under license agreement with Sea Breeze Analytics, Inc.