WEEKLY RESEARCH: Weekly Insider Data and Commentary files were last updated on Sunday, March 19th, with data from the Friday, March 17th SEC closeout. Please review your Commentary File for particulars. The Insider portion of the Workbook section of the WebSite was populated with new weekly data and e-mail versions were distributed as well. (Data for all companies, and broad strategy commentary highlights) The Insider Commentary file of the past weekend includes an updated, thumbnail Strategic view of the Markets from the top-down perspective of all models. The MPT Top Down View Remains at an outright Sell this week. All models suggest that a significant and sharp decline in prices lie directly ahead. At the Sector level, Conglomerates, Retail/Wholesale, and Utilities occupy the first 3 slots. Finance remains particularly problematic from the Insider perspective. The Markets cannot be viewed as a singular snapshot, but are instead a dynamic, moving picture. Employing MPT research to follow and anticipate the most probable trend features and changes is an important aspect of the research.
MONTHLY RESEARCH: The March 2017 edition of Market Profile Theorems was run based on the data close-out of Friday, February 24th, 2017. Your specific data files were pushed to you on Sunday February 26th, 2017. The WEB site data (Workbook section) was available on Monday at 9:10 AM, and included refreshed Probability Plots, Screening features, and Files located in the monthly File Download section of the Web-site. The Strategy notebook should have arrived on Thursday, March 2nd. If you did not receive your files, or the notebook by the dates indicated, please contact us. Reach us by e-mail or call 206-890-6789 if you wish to schedule a conference call in March.
GENERAL COMMENTARY: Style closed February with no Capitalization preference and a Value bias. The March asset allocation projection has a Small-Capitalization preference, and expects Value will lead performance. MPT bottom-up model performance, relative to the S&P 500, was poor in February. The aggregate top-down model remains fully Bearish at "-4" this week, and the Technical model improved to a still-Bearish -1. The negative trend of the Top-down Earnings model continued last week (-10.64), remains in a well-defined, descending channel, and has broken an important support level. It argues for patience in the longer-term. A mark-down phase is well underway, and the rally window, from Feb of 2016, closed in June. Yields headed lower last week. The quickening pace of inflation, (3% over the past 6 months), recent drop to 1.3% in Q1 GDP estimates, and a surprisingly low Q4, 2016 GDP number of 1.9% starts the Stagflation conversation again. Accelerating downward analyst revisions, The GDP for Q3 was 3.5%. The last half of 2016 did better than the first half, with 1.8% for the year now a good estimate. The overall trend remains concerning for the Markets - especially with what we see as alarmingly high valuations present for equities. See the weekly Insider Commentaries, and the monthly Strategist, (Green Book) for further details and interpretation. The weekly Insider Commentary provides additional color. A stronger Dollar, and the recent uptick in inflation are problematic for the economy - particularly with the recent fall off in orders. Gold fell for the second week, closing, at $1201.40, while short-term extended, the long-term remains constructive for higher bullion prices.
The Market Cycle, in terms of MPT's "Market Clock," remains at 10:30, was in a MARK DOWN phase for the last half of 2014 through 2015, and began 2016 with the same profile. This Bull cycle within a Secular Bear Market has closed. Please see the current weekend's Commentary, as this has important implications for the Equity Markets. Insider, and the Summary model, will drive performance going forward.
Top-Down Review: Following a very accurate 2011 and 2012 for Buy and Sell price targets based on our Top-down models, 2013 started a period where top-down pricing levels were more difficult animals to wrestle with. Our upside targets were far short of levels reached that year, and our downside view too aggressive. 2014 started out weaker and was more in line with our long-held expectations for significantly lower equity prices but, with the exception of the Small-cap space, the trend into the close of 2014. 2015 was an anemic year for overall price performance in the major benchmarks. 2016 was an average performance year for equities with gains around 9.5% for the S&P 500 - far better than the significant loss we had anticipated. Bottom up performance for all of our models was quite good in 2016, with all long-side selection portfolios outperforming the S&P 500. Our expected price range for the S&P 500 in 2017 is again Bearish with a high of 2300, low of 1560, and a close of 1950.
MPTonline.com is the web-based application for professional investors. Market Profile Theorems, Inc. has been a provider of Behavioral Financial models, integrating Insider, Earnings, Technical and Style aspects, for 27 years. The behavioral approach to equity selection provided by MPT adds unique insights to the equity selection process, and compliments more traditional fundamental tools. Coverage has averaged over 5000 U.S. companies, with aggregated views on 16 Economic Sectors and 59 Industries, and Top-down Strategic views on the broader market. The work is therefore useful for both "bottom-up" and "top-down" applications. The combination of non-correlated MPT models allows for sufficient risk control in the process to allow equity portfolio managers to run money using this powerful suite of tools alone, while at the same time allowing for integration of existing models favored by the user.
The MPT research display features are designed to improve the decision-making process. One example of this is our presentation of the 4 basic MPT models, (Insider, Earnings, Technical, and Summary), in the context of a probability matrix defined by past model scores for each Company, Industry, and Sector we monitor. Another feature is the color-coded 28-month time series for each model - revealing significant changes in each model at a glance. A more specific description of the concept, methodology, and use of the various behavioral perspectives we provide, can be found by clicking on the individual tabs for each model found at the top of this page. The underlying data and graphics are available only to subscribers to MPT research.We view Corporate Insider behavior as a subset of Behavioral Finance. While in and of itself Insider activity can be useful in adding to the decision making process, it can also be thought of as the initial starting point in a decision tree of information which includes other important inputs such as Analyst Behavior, Market Style (Value/Growth, Large/Small-cap), and Relative Price Strength driven by the market trading mechanism itself.
Behavioral Finance & Corporate Insider activity – Point of Departure. At Market Profile Theorems we use Behavioral Theory in a sequential "waterfall" manner – looking for confirmation of positive events at the Insider level (Market or Self-relative), from the analyst community, or in price movement itself. Positive or negative events at the initial, Insider level, of analysis can manifest themselves in terms of “Change”, and “Out of Range Behavior”.
The MPT model of Insider Behavior is a 7-factor model - incorporating finely tuned weightings for: Selling and Buying; Transaction size; Transaction date relative to current; Options-related transactions; Historical company behavior; Insider position and; Initial transactions - is not a retro-fitted theoretical model, but has been produced "live" and used by the professional money management community for 24 years. Past performance spreads - between companies ranked best and those ranked worst – have clearly been positive over the period the research has been live.
An corollary to the theory is found in the aggregation of Insider behavior by Industry or Economic Sector. The advantage of cumulative data points amongst aggregation of like-companies provides additional statistical confidence in the behavior observed in this Insider model of robust design. In this approach, Analyst and Market pricing behavior is also aggregated in order to develop a sense of the larger picture.
The following graphic example (Model Scores) provides a dynamic picture of change in MPT Earnings, Insider, Technical and Summary model scores over the past 28 months, with the most recent data point (January 26th 2007) to the right. The Yellow squares reflect the most positive scores in the key models, with Black signifying the most negative conditions. Color gradients from Dark Green to Gray are included. Numeric scores are provided as well. These plots are available for our coverage universe of over 5,000 Companies - which values are aggregated upward through 16 Economic Sectors, and 59 Industry Groups.
Probability Plots, and the Informational Hierarchy. It is one thing to have access to information; another to model it in a cohesive, and actionable manner; and yet another to actually “see” the data in a meaningful context. The graphic provided by the MPT Probability Plot allows visualization of not only Market Relative and Self Relative behavior, but the interaction of a given set of related behavioral inputs as well.
The following graphic illustrates these points. To orient you, the view reveals scores for 4-MPT Behavioral model inputs: Insider (I), Earnings (E), Relative Price Strength (T); and Summary (S) - (the latter combining all models into one).
The highest scores for each model are located at the outside of each model arm and the lowest to the middle. The grey shaded area represents the “normal” range for each model. The red dot reveals the current model score for each variable. A score toward the center, white area, indicates out of range behavior in a negative direction. Think of the connections between current values for all four models as creating the red, shaded overlay on the normalized outcomes. Using this view, one is able to instantly ascertain the condition of the company, industry or sector relative to both other companies, and to itself. In this example, we note that not only is the current Insider model score for the company at the low end of scores for all companies, but it is below the normalized range for the company itself. This is a warning flag. The Probability Plot includes strong scores for both Earnings and Summary models, and their combination with the Insider profile would force us to become "sensitized" and focus on potential upcoming negative changes in analyst estimates and/or Earnings Surprise.
To reiterate, Interaction amongst the various behavioral models is an important feature of our approach. In the MPT view, and after working with this concept for 23 years, we have found that the information flow moves from the Insider signal through Earnings, and is expressed either coincidently or shortly thereafter through a market pricing response. The arrow in the graphic illustrates this flow. Another term we use is that of a “Behavioral Market Clock” , with the Insider input located at the starting, 12 O’clock postion. As illustrated in the example, an adequate Insider "signal" should cause the practitioner to begin focusing on earnings revisions for signs of movement in the same direction implied by Insider behavior. Managers basing their investment decisions on Value or GAARP should be particularly interested in this type of modeling, as it has the potential for improving the timing of longer-term entry and exit points.
Applying this approach to the concept of a “Market Clock”, and beginning with Insider change, by the time the model score improvement gets around to the Summary model (S), all models have kicked into gear - followers of Insider behavior, Earnings models (revisions and surprise), and Price Momentum, are all “on-board” - and the share price has accelerated significantly.
In the final analysis, the basis for our work is the principle that in a well-designed model, Corporate Insiders – whether by action or inaction – buying or selling – provide initial clues as to how they perceive the relative attractiveness of their own company shares. These clues gain cachet through an Insider's proximity to corporate developments, training, and the wherewithal to act. They have tended to be correct and serve as primary nodes in our particular Behavioral model – more often than not leading both the analyst community and price direction.We hope you find the advanced features provided in this on-line version of the MPT data a useful resource. We welcome commentary and look forward to visiting each of you over the coming months to present applications of our extremely exciting new perspective.