Portfolio Alpha From Relative Strength

Portfolio Alpha from
Relative Strength
An Introduction to Relative Rotation Graphs
By Mathew Verdouw, CMT
Disclaimer
NO FINANCIAL ADVICE - The Information in this presentation is provided for education and
informational purposes only, without any express or implied warranty of any kind, including warranties
of accuracy, completeness, or fitness for any particular purpose. The Information contained in or
provided from or through this material is not intended to be and does not constitute financial advice,
investment advice, trading advice or any other advice. The Information in this material is general in
nature, educational and is not specific to you the viewer or anyone else.
YOU SHOULD NOT MAKE ANY DECISION, FINANCIAL INVESTMENTS, TRADING OR OTHERWISE,
BASED ON ANY OF THE INFORMATION PRESENTED ON THIS MATERIAL WITHOUT UNDERTAKING
INDEPENDENT DUE DILIGENCE AND CONSULTATION WITH A PROFESSIONAL BROKER OR
COMPETENT FINANCIAL ADVISOR. You understand that you are using any and all Information available
on or through this material AT YOUR OWN RISK.
RISK STATEMENT - The trading of stocks, futures, commodities, index futures or any other securities
has potential rewards, and it also has potential risks involved. Trading may not be suitable for all readers
of this material. Anyone wishing to invest should seek his or her own independent financial or
professional advice.
Mathew Verdouw, CMT
28 February 2014
About Me
Honours Degree in Computer Systems Engineering.

Started Market Analyst in Australia one year after leaving
University.
Designing and building software models for 18 years.

Based here in Charlotte as we continue to expand our company.
Obtained the Chartered Market Technician Designation in 2013.
Passionate about breakthroughs in Financial Analysis.
Mathew Verdouw, CMT
28 February 2014
About Technical Analysis (TA)

Technical Analysts are less concerned with Value and more concerned
with Price.
We create mathematical models on price and apply statistics to the

signals to determine if there is validity in them.
There are many sub-disciplines in Technical Analysis, some of which

are very subjective.
Relative Strength is a method that takes a fundamental value concept

and fuses it with technicals to produce an amazing result.
Mathew Verdouw, CMT
28 February 2014
About Relative Rotation Graphs

Developed by Julius de Kempenaer
Sell Side Analyst in The Netherlands

Not enough to have a position on a
security
Needed to have a way to get a Market
Overview
Needed to view that overview relative
to a Benchmark
Available in Bloomberg as a static
chart since 2011

We have made them a dynamic
chart.
Mathew Verdouw, CMT
28 February 2014

Based on Relative Strength.
Take the change in the security and
compare that to the change in the

Benchmark (Index). The direction of
the line is the Relative Trend.
Math is applied to determine not only
the ratio between the two, but also a
measure of the momentum of the
rate of change.
Each of these figures are normalised
and plotted on an XY chart.
Mathew Verdouw, CMT
28 February 2014

Leading (Green).
Security here is out-performing
the Index.
It is one of the strongest in the

sector.
Relative Trend is positive and it is

moving ahead of the Index.
Mathew Verdouw, CMT
28 February 2014

Weakening (Yellow).
Security is still out-performing.
Relative Trend is now negative so
it is losing ground on the Index.
Exits and short opportunities exist

in this quadrant.
Mathew Verdouw, CMT
28 February 2014

Lagging (Red).
Security here is now underperforming the Index.
It is one of the weakest in the

sector.
Relative Trend is negative so it is

falling further behind.
Mathew Verdouw, CMT
28 February 2014

Improving (Blue).
Security is still under-performing.
Relative Trend is now positive so it
is gaining ground.
Long opportunities exist in this

quadrant.
Mathew Verdouw, CMT
28 February 2014
10

Discovery - the securities on the
chart tend to rotate in a clockwise
direction.
IBM from 1st Jan to 28th Feb.

Each dot on the tail is a daily
observation.
Where it has been is often a clue to

where it is going.
Complete rotation around the

S&P500.
Mathew Verdouw, CMT
28 February 2014
11
SP500
Mathew Verdouw, CMT
28 February 2014
12
Using Them Top Down

Looking for opportunities in the
market.
Top Down Example
Start with the S&P 500 Level 1 sectors.

Zero in on the sector with the most
promise.
Find the stock within that sector that
shows the most promise.
January 16th, 2014
Utilities Sector is showing the most

promise.
Mathew Verdouw, CMT
28 February 2014
13
Using Them Top Down

We Drill In to the Utilities sector to
see what we can find.
It can be messy we shortened the

tails to 5 days.
PEG is showing the most promise.
Mathew Verdouw, CMT
28 February 2014
14
Using Them Top Down

At this point I would be looking at a
Price Chart to get the confirmation
that I need.
Here is PEG on the 16th Jan

What I see:
Double Bottom
RRG Momentum supported
by Ratio
Very strong price bar

Mathew Verdouw, CMT
28 February 2014
15
Using Them Top Down

Here we can see the Path through
the RRG for Utilities (red) and PEG
(olive) since Jan 16th.
Utilities performed well, PEG

performed better.
WARNING!
PEG can still outperform the index

when both are losing value.
PEG may be just losing less than the
Index.
Mathew Verdouw, CMT
28 February 2014
16
Using Them Absolute Performance

PEG 16%
Utilities 6%
Sp500 -1%
17
Using Them Portfolio Management

If I am a Portfolio Manager there is
always a benchmark that I am judged

against.
Otherwise may as well invest in an Index

fund!
Sample fund of 100 names with the
Sp500 as my benchmark.
I can use the RRG to find the items in
my portfolio that are weak and need
to be removed.
But given that Portfolio Management
is not as simple as Buy/Sell, What can
I do?
Mathew Verdouw, CMT
28 February 2014
18

With the RRG we can consider the
weights of each member of the

Portfolio against the weight of that
security in the benchmark.
As a Portfolio Manager, for each
security I may choose to :
Be Overweight hold more in the

portfolio than the benchmark has.
Be Equalweight hold the same
percentage.
Be Underweight hold less than the
benchmark has.
Ticker
Weight
BM
AA
US Equity
0.078
0.078
ACT
US Equity
0.049
0.03
ADBE US Equity
0.04
0.03
ADP
US Equity
0.024
0.049
ADSK US Equity
0.003
0.01
AKAM US Equity
0.033
0.03
ALXN US Equity
0.049
0.049
AMAT US Equity
0.03
0.012
AMT
0.012
0.03
0.058
ATI
US Equity
US Equity
Doing this correctly leads to Alpha.

Mathew Verdouw, CMT
28 February 2014
19

Here we have coloured the securities
in my Portfolio as follows:
Green Overweight
Blue Equal weight within 1%
Red Underweight
My Goals are as follows:
Be Overweight any security that is in the

leading quadrant.
Be Underweight any security in the
lagging quadrant.
Use discretion in the other quadrants.
Mathew Verdouw, CMT
28 February 2014
20
Im Overweight or Equal weight on most

of the leaders.
The exceptions are what I want to have a
look at:
ECL
MAS
STZ
I would even question why I am Equal

Weighted on TDC when it has such
conviction.
Big space between the dots

Big arrow.
Has not turned.
Mathew Verdouw, CMT
28 February 2014
21

Im Underweight or Equal
weight on most of the laggers.
The exceptions are what I want

to have a look at:
CME
Mathew Verdouw, CMT
28 February 2014
22

CME
Divergence between CME and
SP500.
Mathew Verdouw, CMT
28 February 2014
23

The Improving quadrant is
where the long opportunities lie.
FAST, IPG and EL look

interesting.
Mathew Verdouw, CMT
28 February 2014
24

By combining Relative Strength
against a benchmark with my

personal weights, I have a rapid and
simple way to zero in on the
securities that require my immediate
attention.
There are other dimensions that can
be added too.
Sector Weights makes an interesting

study.
Contact me for a white paper on this.
Foreign Exchange RRGs

Intraday RRGs
Mathew Verdouw, CMT
28 February 2014
25
Portfolio Alpha from Relative Strength

Thanks for listening!
Mathew Verdouw, CMT
Email : [email protected]
Web : www.mav7.com
LinkedIn : MathewVerdouw
Mathew Verdouw, CMT
28 February 2014
26

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Portfolio Alpha from

Mathew Verdouw, CMT

Honours Degree in Computer Systems Engineering.

Designing and building software models for 18 years.

About Technical Analysis (TA)

We create mathematical models on price and apply statistics to the

There are many sub-disciplines in Technical Analysis, some of which

Relative Strength is a method that takes a fundamental value concept

About Relative Rotation Graphs

Sell Side Analyst in The Netherlands

Available in Bloomberg as a static

chart since 2011

Mathew Verdouw, CMT

About Relative Rotation Graphs

compare that to the change in the

Mathew Verdouw, CMT

About Relative Rotation Graphs

It is one of the strongest in the

Relative Trend is positive and it is

Mathew Verdouw, CMT

About Relative Rotation Graphs

Exits and short opportunities exist

Mathew Verdouw, CMT

About Relative Rotation Graphs

It is one of the weakest in the

Relative Trend is negative so it is

Mathew Verdouw, CMT

About Relative Rotation Graphs

Long opportunities exist in this

Mathew Verdouw, CMT

About Relative Rotation Graphs

IBM from 1st Jan to 28th Feb.

Where it has been is often a clue to

Complete rotation around the

Mathew Verdouw, CMT

About Relative Rotation Graphs

Mathew Verdouw, CMT

Using Them Top Down

Start with the S&P 500 Level 1 sectors.

January 16th, 2014

Utilities Sector is showing the most

Mathew Verdouw, CMT

Using Them Top Down

It can be messy we shortened the

PEG is showing the most promise.

Mathew Verdouw, CMT

Using Them Top Down

Here is PEG on the 16th Jan

Very strong price bar

Using Them Top Down

Utilities performed well, PEG

PEG can still outperform the index

Mathew Verdouw, CMT

Using Them Absolute Performance

Using Them Portfolio Management

always a benchmark that I am judged

Otherwise may as well invest in an Index

Sample fund of 100 names with the

Using Them Portfolio Management

weights of each member of the