Market School

I just returned from Market School which was held in Las Vegas. It is difficult to go to Vegas without taking your wife so I was gone longer than required for a one-day seminar :)

The course offered 95% new material which is a first for me. I have been doing CANSLIM for quite a while and it is difficult to show me new material on the subject. Market School unveiled a new timing and allocation model being used by Bill O'Neil's portfolio managers. The school was taught by Mike Webster (Bill's head portfolio manager) and Charles Webster another very experienced portfolio manager. Bot of these individuals created and teach the seminar called Chart School, another course that is also very good.

The only old material was a short review of a FTD. The Market model uses 1.25% threshold for dates after 1/1/2000 and 1% prior to this date. There are rare times when volatility is extremely low and the FTD threshold is reduced.

What was presented was a market timing model utilizing 10 buy signals and 12 sell signals. The timing and allocation model has been back tested back to the beginning of the NASDAQ and spot checked at significant periods such as the 1930's and 1950's. The intent of the signals is to generate a “count” signifying the maximum percent exposure allowed by portfolio managers in the market. There is also a Buy switch that may be On or Off or in “Forced On” state when a “Power Rally” is effect. A power rally occurs if the 21-day ema is trending above the 50-day sma for at least 8-weeks and the index has not breached below the 50-day ma.

The Buy Switch is generally turned on when we see a FTD (B-1 signal) and can be On at times with zero exposure allowed if enough sell signals are generated but the uptrend is still in tact. Essentially the buy signals build up evidence that the rally is proceeding well, the larger the count the more positive evidence and correspondingly the more money that can be allocated in the portfolio. I don't know how much money these portfolio managers run using CANSLIM but something north of $100 million dollars each.

The exposure levels are zero, 30%, 55%, 75%, 90% and 100% based on a market count of zero through 5 (maximum). Each correctly interpreted buy signal increments the count. Each correctly interpreted sell signal decrements the count. In a couple of market simulations shown at the seminar these signals were used to force selling and also open the portfolio to additional exposure over the course of a market rally. Nothing of course eliminates the need to find leading stocks breaking out of sound bases.

The course should prove useful. Because of the complexity of the material the technique may not be taught in any other venue. If they tried to bring it into the Master’s program (two-day level-4 seminar taught by Bill O'Neil) it would likely cause that course to be too long. For Leader Board users (an O'Neil product recently unveiled) a new feature will be turned on relative to market timing but only after taking Market School. This new feature will have the current model state with buy and sell signals.

I generated the following signals from the current market using the 10/12 FTD on the NY Composite. Because the format of this message does not allow extra spaces to be used the table will look a little jumbled. The order of the terms are: Date, Signal, Exposure Count, Buy Switch, Exposure Limit, Distribution Count. I know this will be difficult to understand without supporting material but I did define below what each of the signals that triggered.

Date Signal Exposure Buy Exposure Distribution
Count Switch Limit Count
Oct 10 B3 1 Off 0% 0
Oct 12 B1 2 On 55% 0
Oct 14 B4, B6, B8 5 On 100% 0
Oct 17 Distribution 55% 1
Oct 18 B2 5 On 100% 1 (Exposure count forced to maximum of 5)
Oct 19 Distribution 2
Oct 20 S1 4 On 90% 3
Oct 21 B2 5 On 100% 3


Here are definitions of Market Buy and Sell Signals:
B1 = FTD
B2 = Additional FTD that could occur within 25 days of an initial FTD
B3 = index intra day lows above 21 day eMA
B4 = Index trending above 21 day eMA (intraday lows continuously above 21 day for 5 days)
B5 = Living above the 21-day (intraday lows continuously above 21-day for 10 days)
B6 = Intraday lows above 50-day [U]and [/U]50-day moving up
B7 = Accumulation day, after 25 days after a FTD an accumulation day is a FTD like event that additionally must close in the upper 25% of the range and close above a 13-week high
B8 = Market makes a new high (a higher than the last marked high on MS chart)
B9 = Downside Reversal Buyback, If a S11 sell signal occurs this buy back signal occurs if the index closes above the intraday high of the downside reversal within two trading days
B10 = Distribution day fall off. When an old distribution day falls out of a 25-day window the distribution count is decremented. When the count drops to 4 as long as the index closes above the 21-day ema and the Buy Switch is On

S1 = Close below FTD lows
S2 = Failed Rally Attempt, undercutting day-1 of the rally. Market Exposure forced to zero.
S3 = Full Distribution Count minus 1. Full distribution count means six days of distribution within the last 25 days. There are some esoteric ways that distribution can be removed from the count that I may go into sometime.
S4 = Full Distribution (Count = 6). This rule is applied again if more distribution occurs up to a maximum of Distribution Count = 8
S5 = Break Below 21-day ema. Index close 0.2% below 21-day
S6 = Overdue break of 21-day. If index has been trending above the 21-day for 25 days or more, this sell signal is generated if the close is 0.2% or more below the 21-day.
S7 = Trending below the 21-day. Sell signal generated on the 5th consecutive day that the intraday high of the index is below the 21-day ema.
S8 = Living Below the 21-day. Signal generated on the 10th consecutive day the intraday high is below the 21-day ema.
S9 = Break below the 50-day. Signal is generated if the index closes belwo the 50-day sma. Exception occurs on a shakeout (index closes in upper half of range) and closes within 1% of 50-day. S9 is reset by B6.
S10 = Bad Break. Signal generated on a downward 2.5% or greater move and the close is in the lower 25% of the day's range and the intraday high is below the 21-day ema.
S11 Downside Reversal Day. Occurs when we are within 13 weeks of a new intraday high, the index closes in the bottom 25% of range, Closes down for the day, Volume is above average, and spread is 0.75% or higher.
S12 Lower Low. Triggers when closing below the last market low as defined by MarketSmith (see note below how MarketSmith marks lows.



Note, the way MarketSmith and WONDA marks significant highs and lows on charts is that the labeled date must be the highest high or low within 9 days looking both forwards and backwards. This relates to buy signal B8 and sell Signal S12.