Model Portfolio Methodology

Contents:

Portfolio Objective  -  Holding Period  -  Portfolio Watchlist  -  Selection Criteria  -  Permitted Securities

Targets  -  Stop Loss Levels  -  Definition of Triggers  -  Trade Management  -  Commissions  -  Periodic Adjustments

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Adjustments to Portfolio Techniques, effective Aug. 2007...

Note: A few changes have been made with respect to model portfolio methodology, effective Aug 2007...

The leading change pertains to the anticipated holding period of a given trade. 

In a nutshell, the focus of the portfolio has been shifted towards the swing-trading or medium-term trading horizon, from the previous bias towards a longer-term approach. 

This modified outlook has been put in place because it suits both the demographic that is catered to as well as the general trading style that is implemented at TheMarketMessenger.com.

A common belief in the investment world is that technical analysis is only capable of providing short-term trading signals and that the investor with a medium- to long-term investment horizon is indifferent to this field. Our model portfolio is an endeavor towards shattering that misconception.

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Portfolio Objective

The main objective of this model portfolio is to show how an effective use of technical analysis and portfolio management techniques can lead to the construction of a market-beating swing-trading portfolio.

Holding Period

The typical holding period for a given position in the model portfolio varies and is dependent upon a small number of factors including the meeting of targets, the likelihood of further near-term appreciation in the stock, the increased potential for a negative impact on stock price and portfolio/money management considerations (such as the existance of a high level of portfolio allocation to a particular market or industry sector).

Accordingly, the holding period would usually range from several days to a few months. Most often, the holding period will be a few weeks. (Prior to a change in Model Portfolio policy in early-August, 2007, the anticipated typical holding period was several weeks)

Portfolio Watchlist

Trades in the model portfolio typically have a time horizon of several weeks to months. Securities that eventually make it to the portfolio are typically first placed in the portfolio watch list for a short period, during which certain parameters are allowed to play out before the setup triggers and a position is opened. 

Often, many attractive setups will trigger all at once, out of which we only a few will be added to the portfolio. As such, the portfolio watch list, on its own, is a useful hunting ground for the experienced trader/investor.

It is important to note that although the preferred method is to draw opportunities from the Portfolio Watchlist, there will be instances wherein a position will be selected for addition to the model portfolio based on a late-breaking development.

Selection Criteria

Technical developments will be the primary, if not the only, reason for a security’s being added to the model portfolio.

Securities that make it to the Model Portfolio watch list typically need to be showing potential long-term bullish trend reversal or continuation signals. In most instances, decisions need be made based upon developments on the weekly charts; on occasion, given noteworthy developments thereon, daily charts may be used.

Permitted Securities

Stocks <$10: Stocks trading at a price that is lower than $10 at time of addition to the model portfolio receive a maximum allocation of approximately 7.5% of the portfolio value. (This figure stood at 5% prior to May 24, ’07)

Stocks >$10: Stocks trading at a price that is greater than $10 at time of addition to the model portfolio receive a maximum allocation of approximately 15% of the portfolio value. (This figure stood at 10% prior to May 24, ’07)

Major Market Index ETFs: There is no maximum allocation for ETFs (such as SPY, QQQQ, DIA) that track major market indices, other than the natural limitation of the value of the portfolio.

Other ETFs: ETFs (other than major market index ETFs, such as SPY, QQQQ, DIA) will receive a maximum allocation of 20% each.

Margin Trading: Not permitted

Short Stock Positions: Not permitted

Stock/ETF Option Purchase: Permitted. A maximum of 10% of the portfolio may be allocated to the purchase of stock/ETF options. However, the total value (upon initiation) of long options positions in any individual stock/ETF is not to exceed approximately 2.5% of the portfolio value. (These figures stood at 5% and 1%, respectively, prior to Aug 11, ’07)

Stock/ETF Option Writing: Naked call writing is permitted only in options of major market indices such as the S&P-500 and the Nasdaq-100. The notional size of such a position is to be limited to a value that is approximate to current market value of the portfolio. Covered Call writing is permitted in stocks.

Targets

When long-term price targets are easily definable, such as with an inverted head and shoulders pattern, targets are stated. When a target is not easily definable, such as when a stock is added to the list based upon a positive divergence between price and a momentum indicator, the target is initially stated as “to be determined” and often the hypothetical trade is ridden higher with a trailing stop.

Stop Loss Levels

Given that many trading picks that make it to the list often have been victims of a severe downtrend in the months preceding their entry onto the list and that they are perceived to be eking out a bottom (other charts might be showing large continuation patterns), initial stop loss levels might at times be placed several percentage points  -perhaps as much as 25% or more - below price at trade initiation.

The guidelines we follow assume that large draw downs in any given individual position are tolerable and within the spirit of the methods followed in this model portfolio.

Definition of Triggers

Targets and stops are not always based on a stock price; on occasion, a given development on a momentum or other technical indicator might be used as a target or stop loss trigger.

Trade initiation and other triggers are based either on weekly closing prices or on daily closing prices. On occasion, a trade will be entered in anticipation of the completion of an existing potential bullish signal.

Trade Management

Stock/ETF positions that have grown to a size that is large enough to represent an undue risk to the portfolio given any adverse event in that stock/ETF shall be trimmed as seen necessary, irrespective of whether or not stated targets have been met.

Commissions

The following commission schedule will be followed when recording returns in the hypothetical portfolio :

Stocks/ETFs: A flat fee of $10.00 per stock/ETF trade per turn

Options contracts: $1.00 per contract per turn

Periodic Adjustments to Portfolio Techniques

At TheMarketMessenger.com, we are constantly refining our methods in the search of the best portfolio management strategy possible.

We also believe that there is no single set of criteria that will work in all markets at all times and hence...

The guidelines listed above will be reviewed from time to time and will be modified, added to, or removed as seen fit.

A Graphical Representation of the Model Portfolio's Recent Performance...