I was asked whether I could increase the frequency of my signals in the database recently. The short answer is “NO.” I thought I could just send my reply with a blunt (often confused with “rude”) one word answer and a link to a previous post because I was certain I had written on this topic before. After reading through a lot of my old posts, It turns out that I’ve not really addressed the frequency of my signals except for brief and vague comments. So thanks to Alan, I’ll finally spend some time on this very important topic.

The answer to why I do my signals weekly has two primary components. The first is practicality and the second is portfolio management.

Practicality - I am one person. I probably cover more stocks than any other single person. As I have previously mentioned on this blog, my analytical work is not an algorithm or black box program like many quants. I actually look at each stock at least once every week. I use my own experience, judgment and human intuition and I use my own techniques of both fundamental and technical analysis. All of this takes a lot of hours as you might imagine. From Friday’s weekly close until the following Monday’s open when the market is stopped, I have sufficient time to do everything I do for this site and still have time left over for a regular life to enjoy the company of others, perform my responsibilities as an adult, spend time appreciating nature, and do all the things that most people like to do on weekends. During the week, when the markets are moving I just don’t have the time to do any more than the site administration work to update the signals (that usually takes me from Monday until Tuesday) and then general research during Wednesday through Friday.

In 2001 and early 2002 when I started testing out some of my theories with HEDGEfolios, I toyed around with daily signals. Doing this was a great benefit because it forced me to become very efficient and the challenges I experienced contributed greatly to modifying my portfolio management and the techniques I use. However, the daily signals were so consuming that even at my best, I could only do 500 stocks per day and I had no life balance - it was pretty close to 18 hours per day, every day and I knew that would not be healthy or sustainable. Just doing the research to make signal changes used up all my time but doing the administrative site work to update the data is also time-consuming. Doing that every night regardless of the number of signal changes would take me about as long as it does now for weekly updates and I don’t have 28 hours in a day. I had a crazy goal of covering approximately 4000 stocks and I just couldn’t do it with anything more than weekly frequency. As a practical matter, doing signals more often is not physically or emotionally possible for me.

I believe one of the biggest reasons HEDGEfolios has consistently outperformed while still covering between 3,000 and 4,000 equities is that I do not overreact to something on Tuesday that gets reversed by Friday. By not responding to every sensationalized story in market coverage, I am able to reduce (not eliminate) unnecessary trades. More importantly, I don’t drive myself crazy. I have a discipline that says no changing of signals during the week and consequently, I don’t get sucked in to the panic moments. There is a downside and I cannot deny it - it is painful to watch one of my signals be correct on Monday, a little incorrect on Wednesday and a big loser by Friday. This inaction would be unacceptable in my opinion for someone else that has a different personality. The day-trader would be devastated and yet, a long-term investor would likely be okay with it and look at it as an opportunity to average-down. I am in between and due to some of my other portfolio management theories, the tradeoffs make my forced inaction on blowups tolerable for me.

Each investor or trader must understand the frequency that works for them and know how to be disciplined about it. Do not follow or adopt my frequency unless it happens to be your own. There are many reasons why people should ignore my work and the mismatch between their trade frequency and mine is just one of them. If I have an UP signal that gets whacked by Wednesday, make your own decision on what to do on Wednesday - don’t wait to see what I do almost a week later when my next signals are updated.

Portfolio Management - Trading frequency is one of the most personal subjects for any investor and trader. It depends on many factors such as your non-market obligations and personality characteristics that determine how you handle various trading stresses. Warren Buffett is calm as a long term investor - how calm do you think he would be if he was forced to trade something at least once per hour? Conversely, how would a day-trader feel if you told him he had to sit and watch 5-minute trading bars but could only make a trade once per month? Every person’s portfolio management preferences are a result of many factors and for me, trading frequency has a large impact. It’s important to know who you are and what kind of life you want before you figure out the right trading frequency. If I only covered 20 stocks like most analysts, I could certainly do daily signals, probably even twice-a-day signals. But I wouldn’t be able to enjoy my life as I do now and since my portfolio management theories have been based on covering between 3000 and 4000 stocks, weekly fits my personality and needs very well.

We all know the importance of reducing transaction costs and hence, turnover. The turnover stats on my signals with daily analysis was slightly above 1200% per year! That is not only ridiculously high but it will ruin performance. During 2004 and 2005, weekly analysis resulted in total (long and short) turnover around 200-300%. With all the market volatility in the past two years, it was approximately 375% in 2006 and 430% in 2007. Worse yet, 2008 is on track to exceed 520%. My technical analysis formulas are modified to reduce sensitivity to reduce the temptation of more frequent trading and despite all that focus, I am still putting out turnover ratios that make me sick. Certainly, if I was to measure all my portfolio management goals - the area where I would give myself the worst grade would be reducing trade frequency. If I didn’t mind massive turnover, I’d have less of a problem with higher frequency signals. As it is, my portfolio management theories have a goal of longer duration trades, not shorter.

There is a balance that you must maintain between trading frequency and performance. I don’t advocate day trading for myself or for others. I also don’t advocate buy-and-hold or deciding to dollar-cost-average once per month. In fact, I have tested out my technical and fundamental analysis techniques using monthly data to see whether it might be better than the daily or weekly options. I was not happy with the results and emotionally, I felt out of sync and I didn’t enjoy doing what I do. When I evaluated the three trading frequencies I found that daily signals had unacceptably high turnover and lower performance statistics and monthly had much better turnover data but subpar performance as well. The best fit for my style is weekly. Look at my performance statistics and their consistency over the 4 years this site has been online for all to see. Doing weekly signals is a big part of the results at HEDGEfolios and it is so integral to many of my portfolio management theories that I suspect a change would not be advantageous to my performance or how much I love doing what I do.

The HEDGEfolios database is now accessible without requiring registration. However, if you want to use the MY FOLIO page, you will still need to spend a few minutes filling out the membership registration form and authenticating your password. I have reactivated all expired memberships and I expect to continue extending memberships for an indefinite period. The site has been entirely FREE for 2008 and now it’s even more accessible.

In terms of stock market analysis, I don’t do a lot of things the way you are “supposed to do them” - I’ve spent a lot of time creating my own theories and refining them. When it comes to measuring or sensing stock market volatility, I do not follow the VIX. Call me crazy but I prefer to look at the action in the 3405 stocks I cover every week to determine how volatile they are rather than an index based upon options activity in the S&P 500. There are many ways to measure volatility - I’ve created my own methods rather than relying on something I don’t find either intuitive or accurate.

During an average week, the HEDGEfolios database typically has about 300 signal changes in a universe of stocks that now sits at 3405. While some weeks are approximately 50/50 on the new UPs versus new DOWNs, an upward trending market will tend to be closer to 75% new UP signals and conversely, a downward trend will have a 3:1 ratio of new DOWN signals. When volatility picks up - the total number of signal changes at HEDGEfolios may jump to a number like 500 which I consider to be extreme and the ratio of new UPs to new DOWNs will exceed 5:1 which is also extreme.

In very rare circumstances, I have seen two distinct conditions.

The first is High Volatility one week in one direction followed by a reversal with High Volatility within the next two weeks in the opposite direction. That has happened precisely three times since I started tracking this data in January 2005 - I mention the week followed by the HEDGEfolios bias in parentheses.

1. 2/12/2007 (bearish), 2/20/2007 (bullish) and 2/26/2007 (bearish) Prior to the Asian…Carry Trade reversal….Dollar/Yen market selloff.
2. 5/29/2007 (bearish), 6/4/2007 (bullish) and 6/11/2007 (bearish) Prior to the beginning of the credit crisis selloff.
3. 2/25/2008 (bullish), 3/3/2008 (bearish), 3/10/2008 (bearish) and 3/17/2008 (bullish) Prior to the Bear Stearns Bailout rally.

I most recently wrote about this increase of volatility (as I measure it) on March 2, 2008 and again on March 13, 2008 - the day before the Bear Stearns problem was revealed.
The other volatility condition occurred during the past two weeks where I saw High Volatility measures in the same (bearish) direction on two consecutive weeks. On June 23rd, I changed 675 stock signals with a ratio of 10 new UPs for every 1 new DOWN. That was extreme but this week was even more noteworthy. I changed 807 stock signals with 633 new DOWNs vs. 174 new UPs. In the past 6 years that I have done HEDGEfolios, I have never done something so extreme two weeks in a row. During the past month, I have changed 1961 signals with 1651 new DOWNs and 310 new UPs.

I know this may be tough to follow because it is not traditional and anecdotal observations that rarely occur are very tough to evaluate. I get that. My work is not traditional so it is easy to disregard. On June 3rd, I mentioned a rare instance of Divergent Signals in the ETF signals and tried to warn that this typically signals a major market reversal. Other than a few readers of this blog, it was disregarded. Now I am making this new observation. Do what you want with it. I don’t need to tell you that the market is volatile - you already know that whether you watch the VIX or not.

However, the key element of volatility using traditional methods like the VIX rests on the reversal at extremes in a contrarian indication such as buying when the VIX exceeds 30. This is a very dangerous concept and I do not advocate for its use.

I never liked that approach so I do my own thing and look at each stock, the turnover in each and how the composite of all signal changes indicates the market volatility. As for the timing of market reversals, I primarily rely upon this anecdotal data and the HEDGEfolios Timing Indicator. If you look at it, you’ll see that the HF Bearish (red line) has never been so high and you might notice that my indicator went Bearish on June 9th.

On June 9th, the VIX opened at 23.56 and on Monday of this week, it opened at 24.25 with very little changes during those 3 weeks while the market fell 6% over the same time period. What did the VIX tell anyone? And yet, I am sure that the VIX lovers and experts will find a way to mention how great it is when stocks finally head higher, especially if that happens shortly after the VIX hits an extremely high reading.

If you are successful using the VIX or any other common volatility measure, I encourage you to keep doing it. If you are like me and think the VIX is a waste, then I encourage you to come up with your own methods.

From time to time, someone makes the effort to email me with a question/complaint/request as to why I do not allow readers to submit comments on HEDGEfolios. I know there is a general theory that you need to create a community of users to have a successful blog. You decide if HEDGEfolios is a successful blog.

But in the end, I need to have a few other things to be successful. The first one is time. The fundamental and technical database portion of this site is my priority and it requires a lot of focus. I just do not have the time to deal with reading comments or replying to the stuff that I write. Sorry for that but my blog was never intended to be an interactive dialog with readers - it was meant as a place for me to share my thoughts. If you like them, good. If you don’t, good. If it causes you to think, good. If you have (or want to create) your own blog and comment there about my blog and then turn on your comments, that might be a good solution. For the record, in my life I have left one comment on another person’s blog and that was only because I did not have their email. Otherwise, expect …NO COMMENT.

Sometimes (as a way around the no comment on the blog) people email me and I do not respond. I get emails like “you suck” - NO COMMENT. I get emails like “you are always so negative” - NO COMMENT. I get emails asking me to talk about stuff I don’t find interesting or relevant - NO COMMENT. Sometimes I get a short email which contains an intriguing thought or observation and I may reply to those. But mostly, I don’t spend much time communicating with readers. Note that if a reader also happens to be a subscriber to the database, then I respond.

Secondarily, the scumbags that love to soak up our time by sending spam to emails also love to attack blogs through comment spam (see Barry’s blog today). I have no desire to deal with that. So if you really want me to allow comments, you’d first have to create a world without the threat of viruses and spam. Good luck with that.

And lastly, I need to be in control of what happens on this site. If I open the comments and someone says something wrong or offensive, I would feel responsible for what happens here. I just don’t have the time or desire to control a series of messages. In general, I do not attempt to control things that are not under my control.

Now that I have hopefully resolved this issue with enough of my time, from now on expect “NO COMMENT.”

Prior to Tuesday’s (3/20/07) open, I posted a shortlist of stocks that I thought had a good chance to head higher this week. Obviously, the post-Fed move and a more bullish tone to the market made picking winners easier so I won’t be patting myself on the back too hard. From Tuesday’s open until Friday’s close, the S&P 500 advanced 2.43% and an equal weighted portfolio of the 79 stocks I mentioned would have performed 75% better than the benchmark index for a 4-day gain of 4.26%. Of the 79 stocks, 85% went up and of the 12 losers, LUB was the worst at -3.4% and the average of all losers was -1.7%. Winners fared much better with an average gain of 5.3% and the best was IMCL at 26%. The top 10 gainers all exceed 9.5%.

These lists are only guesses of stocks that I think have an abnormally high probability of moving during the week that I publish them. HEDGEfolios is not a stockpicking site and does not make recommendations for buying or selling any security. Each investor is unique and should analyze each stock and discuss it with their financial advisor before taking any action. I know this sounds like a standard cover my ass disclaimer but I actually believe this stuff and I greatly dislike stockpicking sites. One of my concerns with services that send out emails of their top picks every night (or however frequent) are that they do not encourage investors to do the fundamental and technical work that must be done to improve the chance of success. Do not confuse shortlists with shortcuts!

I have been asked why I don’t provide these lists every week and then follow each stock until it is removed or why not provide model portfolios or top ten lists, etc. The answer is that I do not believe your performance will be improved by others (including me) doing more work. I know everyone is busy with family, careers, etc. - but investing and trading is not a part time gig. Unless of course you want to index and then, I would suggest not wasting your time at HEDGEfolios. If you want to make money with stocks, you must do the work and be accountable for the results. HEDGEfolios will help you identify stocks that meet your fundamental criteria and give you some timing help on entry and exit points that I think have a high probability of being good.  But you should be using it to generate ideas or provide confirmation for your own ideas.

I cover over 4000 stocks and ETFs each week and I treat each one the same. I have no certainty about which stocks are going to move 1% vs. 10% or tomorrow versus next week and after looking at so many stocks, I cannot narrow down 200 that I really like to the top 10. About 3 months ago, I studied a long list of 200 stocks, a subset of 100, a subset of 50 and finally a top 10 for a one-week period. Remember - these lists are only my thoughts for the week after being published. Not surprisingly (at least to me) the statistics were not good. The performance of the 200 and 100 portfolios were relatively the same, the top 50 was slightly better and the top 10 performance was slightly less than the top 100. What concerned me the most was that the shorter lists had too many big winners and too many big losers. While the average was good, the negative extremes were bad. Why would this be? My analytical weakness causes it - stocks at support levels tend to either break through extremely or break down extremely and that is why I always accompany these lists with a suggestion of tight stops. Based on this analysis, my decision was to stick to prior beliefs and skip the pursuit of providing lists of defined limits. Some weeks, I generate lists of over 400 and other times, it may be between 50 and 100. It’s up to you to decide which ones, if any, that you like.

The Hedgefolios Timing Indicator found in the ANALYZE - MARKET STATISTICS section is worth a look. Given that I designed it, I am biased and think you should look at it every week - but please humor me and do it today. The HF Bearish (Red) line is above .5000 and the HF Bullish (Green) line is approaching .1000. In the past, these levels have indicated a slowdown to the current trends. This is not the same as a reversal of a trend, but more representative of a point where bullish and bearish moves start to run out of steam. This is not the only reason, but a signficant factor in the more positive (less negative) tones to my posts over the past few days. I won’t feel optimistic about a true bottom until the HF Bearish (Red) line starts to level off, heads lower and finally crosses over the HF Bullish (Green) line. It takes time to do that.

It is critical to have a feel for the general direction of the market and the strength of its current move. I work off the premise that due to the influences of mutual funds, hedge funds, indexing, program trading, etc. that 50% of a stock’s move is related to the market, 25% related to the sector / industry and 25% related to company specific events and performance. Consequently, I obsess over the market and whether it is with me or against me.

Chasing returns is an unfortunate but common phenomenon for investors and typically correlates pretty strongly with the top of individual stock moves as well as tops in the overall market. For years, I spent a tremendous amount of time researching and following a bunch of market indicators to get a feel for when it was too late to get in and equally important, when to get out while the getting was still good. Although I still look at existing market indicators on a monthly basis, I found that the amount of analysis I did was not worth the results. There was too much conflicting data and it was clear that I needed to create something that was fast, simple to use and easy to understand.

Since the Hedgefolios universe of almost 4000 stocks covers over 99% of the total market capitalization and I give “UP” or “DOWN” signals on all of them each week, I knew I had the raw data. It was easy to create a bullish / bearish percent indicator and that is what you find with the second chart on the ANALYZE MARKET STATISTICS section called the “Hedgefolios Signal Indicator.” However, this indicator and bullish percent market indicators in general have some inherent flaws in my opinion given that they are contrary indicators at extremes and they don’t do a good job factoring in the element of time.

As a result, I set out to build an algorithm that fine tuned the rougher Hedgefolios Signal Indicator to exhibit market strength as well as an estimate of the time remaining in the move. Without disclosing the actual formulas, the Hedgefolios Timing Indicator measures the strength of Up signals (HF Bullish) versus the strength of Down signals (HF Bearish) by applying a time factor to each signal and creating a composite score for both sides of the market. Like many of my methodologies, the time factors are standardized and change flexibly with changes in the market over time. If the current reading for the HF Bullish is higher than HF Bearish, the indicator is predicting that the market has an upward bias and vice versa. A crossover of the HF Bullish and HF Bearish lines implies that the market has changed direction. As you can see from looking at the chart, extreme levels are at .1000 on the bottom and .5000 at the top and typically, when either the HF Bullish or HF Bearish readings hit these levels a reversal is not far behind. It is also helpful to evaluate the slope of the lines as they indicate the rate of acceleration in the relative moves as well as perceptions of the buying power and selling pressure.

The ANALYZE - STOCKS section allows you to review the fundamental and technical statistics of stocks in the Hedgefolios universe. Throughout the rest of the site, Hedgefolios focuses on generic terms for the criteria that most investors use to define their investing preferences. However, many investors want to know what those terms mean in numeric values so I provide this section to help you better understand the averages and ranges for the size, style, and income categories. For example, if you are wondering what a typical mid cap stock looks like, just view the data in the second last column to the right. You will see the range of market capitalizations in dollars, the averages of key valuation metrics such as Price-to-Earnings ratio, dividend information, and the distribution of stocks within economic sectors. By scrolling down the page, you are able to evaluate similar data for Value, Blend, Growth and Income stocks. If you are curious whether a particular size or style has an upward or downward bias in the signals, the last portion of each column shows the technical statistics.

I don’t like being wrong, but it’s part of investing reality. Being wrong is easy, but admitting when you are wrong is tough. I’ll get this out of the way - my signals are wrong some of the time. Over the three years that I have been doing Hedgefolios, 33% of almost 15,000 completed signals were losers.

Not only am I admitting my lack of perfection, but I proudly keep it on display for everyone to see. Transparency is important to me. I am not a fan of anyone that makes a bunch of predictions and then hopes that no one remembers the bad ones or that no one can find evidence of them. I would expect you to feel the same way.

Whenever you visit PROFILE, you get a history of my performance on each stock since it was added to the Hedgefolios universe. If you want to see more detailed performance for past signals, just click on ANALYZE - PERFORMANCE and scroll down to the second half of the page. This section summarizes statistics for losing and winning signals inclusive of the average gain or loss, average length of signal and the dispersion of gains and losses.

If you want to study an individual stock or ETF, go to the PROFILE section or from anywhere else on the site, just click on a symbol and it will automatically take you to PROFILE. For your convenience, you’ll find all the Hedgefolios information on that stock without having to go to multiple sections of the site.

The first row of data shows the information from EVALUATE and gives you the definitions of fundamental criteria. The second row provides the current signal and technical data that normally appears in the MANAGE section. The third section lists the historical performance of signals since that stock has been covered by Hedgefolios. If you are looking to find other stocks in the same industry, just look at the last section of PROFILE.

Given that the Hedgefolios database is updated weekly, the price data is NOT real time. I recognize the importance of current information, so I have added a link to Moneycentral’s site. In my opinion, Moneycentral is a superior site for comprehensive and timely financial information inclusive of quotes, charts, news, filings, financials, stock screens, etc. For that type of help, just click on the link below historical signals that says “Click here for more information” and a new browser window will appear with data for the active symbol.