Strength is Risk

Philosophy:

Short weak stocks in weak sectors after a price rally. Enter a short position upon resumption of weakness and remain in the position as long as such weakness continues. Continuously trail the stock with an objectively-calculated sell stop order, determined based on the volatility of the individual stock. Upon execution of the stop order, replace the position with a new position. Let the market take the position out, not the user. Stocks can move farther than expected and it is more important to give it room to move than it is to arbitrarily select a buy to cover price. To do the latter is to presume an ability to predict the stock will go no lower.

Please note that no entry short will occur if the stock does not resume weakness. If no entry takes place, the stock is re-considered along with all other stocks in the eligible universe based on the information produced by the newly-completed trading day. If such strength in a potential short stock candidate takes it above the threshold of a “weak” stock, and/or if the stock’s sector by virtue of the new day’s trading activity is no longer considered a weak sector, the stock under consideration will NOT be a short candidate the next day. In fact, if the sector is re-categorized after that trading day as a strong sector (objectively determined), then only strong stocks from that sector will be considered potential trade candidates.

Process:

Sort market into sectors and sectors into strong and weak. In turn, sort stocks within sectors into strong and weak. Only go short weak stocks in weak sectors.

Position Details:

Once short candidates have been identified, position details are calculated as follows.  Read the rest of this entry »

Philosophy:

Buy strong stocks in strong sectors after a price pull-back. Enter a long position upon resumption of strength and remain in the position as long as such strength continues. Continuously trail the stock with an objectively-calculated sell stop order, determined based on the volatility of the individual stock. Upon execution of the stop order, replace the position with a new position. Let the market take the position out, not the user. Stocks can move farther than expected and it is more important to give it room to move than it is to arbitrarily select a selling price. To do the latter is to presume an ability to predict the stock will go no higher.

Please note that no entry long will occur if the stock does not resume strength. If no entry takes place, the stock is re-considered along with all other stocks in the universe based on the information produced by the newly-completed trading day. If such weakness in a potential long stock takes it below the threshold of a “strong” stock, and/or if the stock’s sector by virtue of the new day’s trading activity is no longer considered a strong sector, the stock under consideration will NOT be a long candidate the next day. In fact, if the sector is re-categorized after that trading day as a weak sector (objectively determined), then only weak stocks from that sector will be considered potential trade candidates.

Process:

Sort market into sectors and sectors into strong and weak. In turn, sort stocks within sectors into strong and weak. Only go long strong stocks in strong sectors.

Position Details:

Once long candidates have been identified, position details are calculated as follows.  Read the rest of this entry »

As noted here and here, we believe in the importance of top-down analysis.  Studies and empirical evidence show that market and sector forces account for most influence on individual stock prices.

To that end, the first step in building a stock portfolio is gauging market and sector strength.  KLD utilizes its own proprietary market and sector risk management gauge to do so.  The second step is to use individual stock level factors to determine long and short candidates and position management.

Key cornerstones of our philosophy are price, relative strength, and objectivity.

Price refers to our belief that price holds all information necessary to determine positions and profit in the market.  Others may disagree, which is fair enough as there are more methodologies than there are people to create them.  But we believe the 80/20 rule applies here, and that our time is better spent analyzing price than determining what additional factors should be incorporated into the analysis to make it more effective.  Succinctly, price is enough for our purposes.

Relative strength means only buying strong stocks in strong sectors, only when market action takes one into the position.  In turn, it means only shorting weak stocks in weak sectors, and only when market action takes one into the position.

Objectivity means the entire system is mathematically- and rule-based.  No subjectivity is used to determine market, sector, or stock “strength” or “weakness.”  In turn, no subjectivity is used to determine specific long or short candidates, order information (position size, entry price, initial protective stop), and position management.  NO PRICE CHARTS ARE USED.  No subjective criteria is considered (including such factors as “support” and “resistance,” trend lines, and similar technical tools) nor are price-derived indicators used (e.g., moving averages and oscillators).

Ultimately, this all boils down to the following:

• The pool of long or short candidates continuously evolves based on market, sector, and stock action.
• Stock position management is objective and takes into account the volatility characteristics of each individual stock.
• The user is indifferent between individual stocks.  There is no emotional involvement in a stock winning or losing for a specific reason.

The next two posts will address going long and going short, respectively.

Strength is Risk: market risk is higher when most stocks and sectors are strong and lower when most stocks and sectors are weak.  Therefore, measure individual stock and sector strength to determine market risk, and adjust portfolio exposure accordingly.  This is the basis for the KLD Capital Management IDExtreme Approach:  Truly Different Analysis for True Strategy Diversification.

KLD Capital creates and deploys a consistent market edge by applying non-traditional perspective to proprietary information to create actionable risk context with the following unique, differentiating tools:
• Inside-Out Risk Analysis, which explicitly looks at risk from stock, sector, AND market levels;
• KLD Sector Risk Gauge, which catalogs 10+ years of price action for thousands of U.S. stocks; and
• KLD Market Phase Analysis, which puts current market price action into historical context.

With these, KLD Capital seeks to take the right actions at the right times to generate superior risk-adjusted returns with stand-alone strategies (e.g., Long/Short Multi-Index Strategy) that complement all other money management methods including buy-and-hold, value investing, and growth investing.  For more information, please see the “Managed Assets” and “Downloads” pages.

On the same day that Tiger Woods won his first tournament after rehabbing his knee, KLD through the graciousness of Lisa Dixon of Pomp Salon gave an educational seminar entitled “How To Be More Effective In The Stock Market:  Lessons Learned and Applicable in All Market Environments.” Read the rest of this entry »

Thank you for visiting the KLD Capital Management blog!  KLD is a money manager with a unique new active management method that seeks to objectively generate attractive U.S. stock market returns by deploying KLD’s proprietary, long-short, price-driven, non-predictive model to align portfolio exposure with market movements.   Much of the “how” and “why” of the KLD method will be covered in this blog.   Please visit often, and feel free to comment or ask questions.