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Coping with the Bear
How to Create a System
[Ed. note. This article was one in a series appearing elsewhere in December, 2008. The following is an expanded and more detailed version of the original which was addressed to Worden's Telechart subscribers. It uses the Telechart names for the steps involved. These are easily accomplished with most other comparable internet data sources, and a spreadsheet if necessary. This page posted 12/16/08. [ Amended for greater clarity 9/6/09.]


First, build a shopping list.You will want maximum liquidity and volatility. I consider these the most important criteria. They are the only ones I use to screen down to my own final lists. Sort All Stocks and flag the top-ranked 50 by Volume (Dollars) 90-day.

Next create a WatchList by Copy to Other List and put the flagged stocks in it. You could use any number of top-ranked stocks you choose. The 50 I use here is an arbitrary number. Fewer may be adequate, depending on the type of stocks or indexes you choose to use.

Then sort this list of 50 by Price Volatility. Flag and save the top 20 to 30 into a new list.

Now you have a new, shorter list with the best liquidity and volatility. Look this list over and subjectively flag the stocks you want to keep as your final list. Apply diversification. Exclude stocks in similar businesses. Choose stocks that have long been your own personal favorites or companies that you are particularly comfortable with.

The point is, this is your list. You want the stocks you like best within the two criteria that you have applied to get this far.

Build the list to any portfolio size you want. I recommend a minimum number of eight (the fewer, the more diversified the list needs to be). Two of my own ETF lists contain 17 and 23 components each. Other lists of mine contain 36 stocks each.

When you have flagged, say, a dozen to 20 stocks, make them into your final WatchList. That's the portfolio you will trade from.

Next, run a six-month, or so, % change calculation on the portfolio you have just created (click C and set the start date six months ago). You can accomplish the same results with less key strokes by using Sorted by Price Percent Change 26-Week, but the C process let's you fine tune for optimizing your time look-back window. Buy the top two or three stocks. Or sell short the bottom two or three ranked stocks. I say 'two or three' because either will give good results. Oviously, three is more work than two, and I like to diminish the amount of work necessary to get results.

The results I post on the website are for two stocks long in up markets and one sold short in bear markets. If you have the knowledge and equipment, you can experiment--otherwise just go with the long-two, short-one (or hold cash) arrangement.

Now, which should you do? Buy or sell? You need to have a way of telling what the trend is. Look at the list and count the gainers and losers. If there are more gainers than losers, the trend is up, and vice versa is down. Be careful with the counting--if the stocks showing up as gainers are inverse ETFs, you have to adjust your net count. That's your trend. Net up: Buy. Net down: Sell (and/or Sell short).

Repeat once a week or once a month. If the six-month count changes from more pluses to more minuses, sell the top-ranked stocks and go to cash (or sell short the bottom- ranked stocks). This method parallels the one I have used weekly since 1999. I add some extra momentum by using first differences, but you don't need to do that.

Returns year-to-date on two of the funds I publish on the website have been +36% and +25% through the end of November--buying and selling short with no margin or other leverage--while the S&P500 is down -59%.

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