Saying it’s better to buy when securities are going up than when they are going down is easy.  Actually determining what is up and what is down is not quite as easy.

We have said and wish to reiterate that you should buy makes good sense to own for fundamental reasons when it is going up and not when its goes down.

We think computers with their cold objectivity can help draw the line between up and down or flat.  As humans, we may tweak our own criteria to make sure that the securities we like are interpreted as we wish them to be, more than as they are in marginal situations.

What makes logical sense to us is to define your criteria of up and down, and then hand-off the task of deciding what is up and down to a machine that has no emotional attachment to the determinations.

Time frame is the biggest issue (1 year, 1 month, 1 week, 1 day, 1 minute, or 1 tick).  The indicator is the next issue (eyeball inspection, moving averages, moving average cross-overs, linear regression, or something else).

Here is a set of examples based on weeks and months, avoiding eyeballs, and using both moving averages and linear regression slopes (price only, not total return — dividends excluded).  It’s not meant to be definitive, just indicative of a computer-based approach you might consider for yourself.  All determinations were done by formula in the MetaStock software tool.  We made up the rules and MetaStock did the work.

We performed the test on 27 categories of assets that represent most of those found in individual investment portfolios.  Not all categories are in all portfolios, but the bulk of portfolios can be described by securities of the general type in this list.

click images to enlarge

In this exercise, we measured the direction (up or down) of the 200-day simple moving average and the 100-day moving average over the past 4 weeks and 2 weeks, and also the linear regression best fit trend line slope over the last 200 days and the last 100 days.

The data which is color coded as green for up, pink for down and yellow for flat, still begs the question as to up or down, but narrows the scope of the information that must be considered.

If this time frame and these measures make sense for your purposes, that’s all well and good — you can decide for yourself the net direction.  If not, it may point the way to an approach for your time frame and indicator choices using a rules-based and computer generated analysis.

Here are the charts for several of the securities studied so show how the indicators reduce the nearly infinitely varied price patterns into some semblance of order for interpretation — and we hope also showing how a machine and indicators can overcome the data overload and excessive subjectivity that the eyeball approach entails.

The gold line is the 200-day average.  The green line is the 100-day average.  The red line is the 200-day linear regression slope.  The blue line is the 100-day linear regression slope.

BND

TLT

TIP

BWX

GLD

UUP

VTI

VWO

FXI

Securities identified in this article: BND, MUB, IEF, TLT, LQD, VWEHX, BWX, EMB, VCVSX,PFF, VTI, VEA, VWO, VGK, EPP, EWL, FXI, IFN, EWZ, TIP, VNQ, DBC, GLD, USO, DBV, UUP.

Disclosure: we own most of these securities from time-to-time in managed accounts.

Richard Shaw
QVM Group LLC

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