My Research

I developed an interest in the stock market at an early age, but never took up the process of investing until high school. I wrote a theme paper on charting with point and figure and earned praise from my teacher for all the work put into it. Point and figure escapes me with its concepts so later on I moved onto bar charts with chart formations. There are various ways of interpreting charts and everyone may have different point of view. I used this from 1989 to 1998 and made money only one year, 1991, where I placed 30th in the US Investing Championships with a 26% gain. I then moved on to system trading with buy and sell rules with ranking systems. Portfolio 123 became my stock selection program and Metastock I use for market timing. I have excelled in investing because of my pursuit and eureka moments. I am a 2-time World Champion and runner-up. I hope this essay will help you in time.

 

Bear markets were my first target of analysis. I never became good at investing until I mastered this. Here are a few tips:

1) Bear Markets are preceded by a “stalling out” motion and corrections go down right away.
2) Bear Markets happen in weak markets and corrections happen in strong markets.
3) Corrections can happen at any time and I don’t focus on forecasting them/
4) There are 4 different setups for bear markets. “One size fits all” analysis does not work.

The process of determining when to get back into the market uses a combination of price and volume for the Pep Indicator and a buy signal. This is sufficient and has been backtested and live tested enough.

Backtesting is the process of improving results over time using buy rules, sell rules and a ranking system. I look for smoothness of the equity curve and consistency over time. Just getting a great results may not be good if it looks like a fairly bumpy ride. Investors want to know if it works in 2000, 2001, 2005 etc. Having a disaster year may be fodder for finding another profession.

Indicators are used to help understanding the market. I use the Market Strength Indicator to see if the market is weakening before a bear market. The Pep Indicator is used to see when to get back in. I use momentum indicators to measure activity in the market to show how strong an advance is. Metastock and Portfolio 123 are very useful in this regard. Portfolio 123 is a quantitative analysis package and listed below are some buy and sell rules.

Buy Rules

Here is a list of which buy rules I count on for simulations regarding stocks:

Asset Turnover, Average Volume, Beta, Current Ratio, Debt, Earnings per share growth, Exponential Moving Average, Gross Margin, Last Time sold, Market Capitalization, Net Profit Margin, Operating Margin, PE Ratio, Price, Rank, Return on Investment, Return on Equity, Sales Growth, Sharpe 1 Year Ratio, Up-Down Ratio.

Sell Rules:

3 Year EPS falls below threshold, Minimum Profit, Percent drop from the top, Quarterly loss, Rank falls below threshold, Stop Loss, Sunset Rule

Books:

I have found that there are few books that will teach you what you want to learn. They teach what the writer has to offer, and they more than likely will not address your questions. The benefit of designing your own system is that you know where to fix it if things go wrong. Using other people’s system drives you to forever asking the developer how to use it in various situations.

DCAM Timer:
This new timer does much better than MACD or MACDD. Here are the rules:
Buy
Price > EMA(28) AND
EMA(14) > EMA(24) AND
Stoch(50,2) > 32

Sell
Price < EMA(28) AND
EMA(14) < EMA(24) AND
Stoch(50,2) < 32


Methodology:

1) For buying large cap stocks, find solid stocks with growing earnings, for selling large cap stocks I wait until the stock starts breaking down

2) For buying small cap stocks, find exciting earnings reports, for selling small cap stocks I usually sell when the gain is somewhere above 50%
3) For ETF’s it’s basically trend following and long only. Switch when the DCAM reaches a sell signal.
4) For Options I buy stocks with the DCAM timer and sell when the profit of the underlying stock reaches 11%

The art of developing systems is a daunting task. The field of finance is a lifelong journey, and the ups and downs may get to you. You need to trust your system as developed or change it if it is very wrong.

Good Luck!

Bryan Johnson
Moon Run Report