Combine 100 nuts and bolts analyses for 100% winning probability

I was speaker at a recent seminar and my topic was about relative strength overlays. Halfway through the event a participant asked me pointedly whether it was any use. This is my answer:

  1. I do not have any one-size-fits-all-sure-win-strategy to share.
  2. There is a probability of loss in every trade.
  3. How well one performs consistently depends on one’s decision making process: there are many moving parts involved internally (one’s psychology) and externally (market) so only a comprehensive, consistent and scientific approach can give one a higher chance of winning.
  4. An overlay analysis is not a trading strategy; it is a nuts and bolts piece of analysis in one’s trading toolbox but not the only one.
  5. Does it give one a clearer picture of the market? Is there even a tiny 1% value in using it? Yes.

Such an analysis does not look Wow! and when I have to caution participants with this disclaimer ‘past trend does not equal future performance‘ before I speak, it is easy for participants to be skeptical.

However, it is a scientific approach that can be repeated and can improve one’s reading of the market. Speaking for myself, if there is even a 1% improvement to my odds of winning I would embrace it wholeheartedly. If I could combine 100 analyses to get a 100% chance of winning I would no matter how much effort it took.

As example, this was an analysis that I did in October last year ‘These stock sectors may be your early bear indicator‘. In this piece, I pointed out that Energy, Consumer Staples and Real Estate were three worst performing sectors in the US stock market.

This heatmap captured today from Select Sector SPDR indicates that these three sectors are still the worst performing year to date.

Screenshot captured from Select Sector SPDR showing YTD sector performance

Screenshot captured from Select Sector SPDR showing YTD sector performance

Whether it is an overlay of relative performance or a sector performance heat map, useful information is available at your fingertips if you are willing to look.

If one snapshot of the market doesn’t tell much, then surely looking at a series of snapshots over a period of time one will be able to spot a trend. If one can make a reasonably accurate forecast, there should be a pot of gold to be found.

Don’t brush these nuts and bolts aside casually.

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