If you detect the development of a rising wedge, especiauy if the wedge is being confirmed by other indicators, you might take these actions:
Sell at the upper boundaries of the wedge.
Sell on a violation of the lower boundary of the wedge.
Draw the trendlines forward to see the point at which the upper and lower boundaries would meet. If you are selling short because of a rising wedge formation, you might want to use that point as a stop. Cover if the market rises above the level of that point, which usually takes place with an upside run around and above the point of upper and lower hendline convergence.
If you detect the development of a declining wedge, especially if the formation is being confirmed by other indicators, you might take these actions:
Buy at the lower boundaries of the wedge.
Buy when the wedge’s upper trendline is penetrated.
Place protective stops at the convergence of the upper and lower trendlines.
May 12th, 2009 in
Futures |
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Declining wedge formations have the following characteristics:
The stock market is falling in price.
Trendlines drawn across price highs decline at a constant angle, reflecting uniform selling.
Support trendlines, drawn at price lows, also decline, but a lesser angle than selling trendlines, indicating increasing eagerness on the part of buyers, who are hoping to accumulate stock. Therefore, rising and declining trendlines converge.
Trading volume decreases during the formation, indicating diminishing selling pressure. This is an important condition.
This pattern suggests that although selling pressures remain fairly constant, buying pressures are increasing; buyers are willing to step in at each minor cycle following less in the way of market decline. Tlus pattern, which usually resolves to the upside, carries bullish implication.
Wedge formations tend to be very reliable for short-term and day-trading operations. This is one of my favorite personal charting patterns for day-trading purposes.
May 9th, 2009 in
Futures |
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The simplest way to demonstrate the contribution of micro caps to the asset allocation process is to look at some simple what-if simulations involving micro cap stocks along with other large asset classes. In this instance, the portfolio benefit of micro caps is examined, but the analysis can easily extend to showing the benefit of other asset classes such as international stocks and real estate investment trusts. The examples are designed to be simple and to prove the case that micro caps as an asset class add value in the multiasset portfolio.
In the case of real-life asset allocation situations, consultants and fiduciaries put constraints on the minimum and maximum asset allocation for any given asset class. The specific investment policy and existing nature of the portfolio dictate these constraints. The tax status of a portfolio may have an effect on the amount of income-producing assets that might be targeted for a portfolio. In a taxable portfolio, the allocation may be skewed more heavily toward investments that produce capital gains such as common stocks. In a tax-exempt portfolio, it is likely that the policy guidelines might be more biased toward higher allocations of income-producing assets. Total asset size is also a potential factor when considering allocation targets. Very large institutional portfolios may not be able to effectively use smaller and less liquid asset classes such as micro caps as a part of their overall strategy due to their varying size or liquidity needs.
With the goal of avoiding overly complex math, it is worth examining the potential portfolio contribution of micro caps by constructing a simple set of what-if portfolios using stocks, bonds, and micro caps. These what-if portfolio simulations take simple allocations and add micro caps in varying amounts over differing time periods in an attempt to determine their potential investment contribution to portfolio performance. In this simulation we use the following asset classes. Large stocks are represented by the S&P 500, and bonds are represented by the Lehman Intermediate Government Corporate Bond Index, both of which are very large liquid benchmarks used by institutional investors. Micro cap stocks are represented by the Wilshire Micro Cap Index, an unmanaged index of micro cap stocks that represents the smallest 10 percent of market capitalization in the Wilshire 5000, a broad-based U.S. stock market index. The time period used is the 25 years ended December 31, 2003, which is about as far back as the Wilshire Micro Cap Index extends.
The what-if scenario begins using the classic balanced portfolio that is 60 percent stocks and 40 percent bonds. This case would have provided the investor a return of 7.7 percent, with an annual standard deviation of 13.3 percent before fees and expenses. This is the de facto generic standard balanced portfolio that is used almost universally as the point of departure for institutional portfolio performance measurement. The question is then posed: How would the outcome have differed if the portfolio contained micro cap stocks? For our purposes, we will add micro cap stocks in 5 percent increments to the portfolio while lowering the stock component by a similar amount.
It is remarkable to see that by simply adding the first 5 per-cent allocation of micro caps, the overall return in the portfolio jumps to 8.2 percent while the annual volatility drops modestly to 12.7 percent. Thus, a very modest allocation of micro caps begins to have an immediate and substantial positive impact on the standard balanced portfolio. Moving the allocation of micro caps to 10 percent continues to add benefit as the annual return moves up to 8.7 percent, but more important, the annual standard deviation drops sharply to 11.6 percent, a 100-basis-point decrease in overall portfolio volatility. The volatility of the portfolio continues to decline until micro caps reach 42 percent of the allocation, at which point the volatility begins to rise. Thus, from a purely theoretical point of view, returns increase and volatility declines up to a 42 percent allocation. From a practical point of view, it is unlikely that any institutional investor with responsibilities as a fiduciary would recommend that a client carry an allocation of 42 percent micro cap stocks. However, it is relatively simple to demonstrate in most allocation studies that a 5 percent to 20 per-cent allocation in micro caps can increase overall portfolio return while lowering volatility.
May 1st, 2009 in
Micro caps | tags:
Caps,
Portoflio |
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