The Market universe and stock selection

05Oct10

Under the DTN (IQ Feed) / Amibroker Platform I currently use, I am limited to 500 streaming symbols. I have chosen to use this limit as my “Market Universe Basket”, with several categorizations and watchlists defining various subsections.

From these 500 instruments, approx 100 are various indices and indicators, which leave me with around 400 stocks which are categorized by Sector and Industry. The requirement for a stock to enter my list is that it

Either (1) it is a good representative of the industry it is in or (2) is of special interest.

I do not try to include all industries, but do try as much as possible to keep this list balanced, with roughly the same number of stocks in each industry being followed.

As this list is usually full, a new entry would usually need to replace an older one.

In Amiboker, it is possible to navigate through this list by sector, industry. At this level, I use the built in classification of Amibroker to do this. I also have a set of explorations I use which give me an overall picture of what’s generally going on. These are much like Finviz’s maps as well as filtered lists such as:

How many instruments are trading above/below VWAP

How many instruments are trading above their most recent swing high.

.. and others.

This Universe basket will also supply my watchlists. As I mentioned in previous blogs, I do look, and give lots of importance to fundamentals (not limited to earnings reports but can pertain to any information about the stock which is not purely price/volume based). My watchlists are also a basis for what I call “Trading Lines” in my fund: Basically this are portfolios within the main fund for which I can track and report performance. First an instrument enters my watchlist, then it (maybe) is eventually traded, and the performance from that trade is tracked by a trading line of the same name as the watchlist.

These watchlists/trading lines are:

Growth: (Long Only) Companies which have performed well in the past and are expected to continue performing well.

Value: (Long Only) Companies which have either not performed well in the recent past, or have performed well but are out of favor,  but are expected to turn around a corner in the near future. In order for a company to enter this watchlist, a valuation study must be performed which shows that the stock is cheap when compared to the general market.

Dividend: (Long Only) Companies with good fundamentals which offer a high dividend return. Typically stocks of such companies act differently to the overall market, and are also valued differently, offering an interesting diversification point from the Growth and Value watchlists.

Special Situations: (Long or Short) Companies, Commodities or Currencies which are experiencing a temporary shift in perception (can be both a positive or negative perception) which may offer a temporary opportunity in the market. Because commodity and currency markets are a zero sum game I consider all trades in these instruments as special situations.

Technical: (Long or Short) Where there is no other compelling reason to enter a trade other than from a pattern recognition perspective. Trades in this line are also executed in order to balance the overall portfolio (e.g. Shorting the SPY at technically sound levels when heavily long on the other trading lines) There are also some subdivisions of this line which include some automated programs I sometimes play with, but which I have not recently worked on due to time constraints.

Alternative: (Any direction) If I have a new idea which doesn’t fit into anything above, it starts off as a sub section of this line. This is where I dabble with more complex trades such as options calendar spreads and plays on volatility (which i am relatively new to). If a new methodology which is tangible and consistently profitable emerges from here, it will eventually take life as a trading line of it’s own.

I do not limit these lines by a fixed capital amount, but by assigning a certain amount of risk to each trading line. I work with a total “Risk Budget” which comes in the form of Fixed Income from my Bond Portfolio and then split into these trading lines as appropriate. I will explain this methodology in more detail in a future post.

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