The Everyday Investor's No. 1 Secret Weapon
Editor's note: We're wrapping up our special three-part Masters Series from Marc Chaikin today...
Over the past couple of days, you learned the backstory of Marc's "Power Gauge" system... and walked through a breakdown of the first two major groups of factors within the proprietary tool.
Marc, the founder of our corporate affiliate Chaikin Analytics, will cover the rest of the story today with an essay that first appeared in the May 25 Digest. As you'll see, one of the final two major groups of factors in the Power Gauge is the "secret sauce" of the system...
The Everyday Investor's No. 1 Secret Weapon
I'm a visual person, so I've always liked charts...
But back in the 1960s, my branch manager at Shearson, Hamill wouldn't let us have them on our desks.
You see, investment banking clients would come through our area. And he didn't want anyone outside the firm thinking we relied on charts (or the "technicals") in our analysis.
It's crazy to think about now. But that was the reality of the investment world I grew up in...
Still, as I explained yesterday, I learned quickly that I needed charts, technicals, and deeper quantitative tools to do my job as a broker on Wall Street. I knew this combined approach would be the key to my long-term success in the investment business...
I've spent my career since then building tools – including technical aids to help investors know the best times to buy and sell stocks. Of course, these tools also include quantitative approaches for figuring out which companies are in strong positions and which ones aren't.
In short, the culmination of my life's work is the "Power Gauge"...
As I've explained in this series, it's a model that looks at 20 factors. And it allows us to quickly read any stock in the market to learn if we should invest – or if we should walk away.
I began walking through how the Power Gauge works yesterday. We looked over the 10 factors from the Financials and Earnings categories of the Power Gauge.
Today, I'll cover the final 10 factors in two major categories. But before we go any further, I've got a feeling you might have a nagging question...
"Marc, how can you so confidently give away all the details of your model?"
I understand if you're asking that question in your head right now. Most folks who come out of retirement to build a proprietary model like I did don't then tell you exactly how it works.
That logic misses the point, though...
You see, while building the Power Gauge, I've learned that the 20 different factors matter... But something else is more important.
Let me give you an example so you can see what I mean...
Say I make you dinner and give you a list of all the ingredients I used. The scratch-made pasta had flour, eggs, and salt. The sauce included tomatoes, garlic, onions, and oregano.
That's all I tell you, though... I don't give any further instructions on how to make it.
Do you think you could recreate the meal exactly as I did? I'm not talking about making something close to what I made... I'm talking about really nailing it – an exact replica.
If you're a trained chef, maybe you could do that. But we all know there's a lot more to recreating a final product than simply knowing the list of ingredients that go into it.
The Power Gauge is the same way... The 20 quantitative factors are important. Without them, the Power Gauge doesn't exist. But the key to pulling the whole "meal" together is their specific weighting in the process.
I keep that part of the system under wraps... It's proprietary information that allows me to safely share the list of Power Gauge ingredients with anyone who asks.
The great news is that with the Power Gauge, you don't need to worry about the recipe. You can use the model very simply... Just plug in the stock you're interested in and off you go.
Now, with that out of the way, let's jump back in with the final two categories.
The next major group of the Power Gauge is Technicals...
As you may know, technicals look at the price movements of a stock. They're crucial to identifying the trend and finding the best entry point for a quality company.
These are the factors that almost no one used when I started on Wall Street in the 1960s. They're much more common these days... But you still must know how to use them.
The following graphic shows the five factors we use in the Technicals category...
Our first Technicals factor is "relative strength versus the market." This factor shows how a company is performing versus the overall stock market.
With the companies we're looking at, we want to see their stock prices moving higher... And we also want to see their shares outperforming the overall market.
So, for example, if the broader market were up 10%... then seeing our company up 20% over the same period would represent noteworthy outperformance. That kind of outperformance is a strong Technicals factor... And it's what I look for before investing.
Now, the next Technicals factor is one of the most important we track overall...
It's called the "Chaikin Money Flow."
As I mentioned on Friday, I developed this proprietary factor many years ago. In short, it measures the buying and selling pressures in the market.
I learned an important takeaway through my decades of research... When a stock consistently closes above the midpoint of that day's trading range, it's a positive sign.
This Technicals factor looks at how a stock has traded over the past four weeks... And it builds a number from -1 to 1 for each day. We want to see the Chaikin Money Flow above zero... When it's in that range, that's a positive sign for the stock.
Our next Technicals factor is "price strength." This factor compares a stock's price with its average price over the past nine months. We call this long-term average the "Chaikin Trend."
The further a stock trades above its long-term trend, the better... up to a point. That's what our next factors checks for...
You see, the next Technicals factor that we track is "price trend versus rate of change ('ROC')." When a stock gets too far ahead of its long-term trend, just like a pendulum, it tends to swing back for a bit. So this factor is critical in helping us zero in on the right time to buy a stock.
Our last Technicals factor is "volume trend." It's our way of comparing the recent volume of trading with longer volume trends.
Specifically, we want to see recent volume increasing versus history... That tells us prices are moving higher in a healthy way, with more activity in the stock.
These five factors paint the technical picture for a company. And they're crucial for timing our investments. We still have one more group of factors, though...
Our last set of factors in the Power Gauge is called Experts.
This group is our "secret sauce"... It's where we look at what analysts, short-sellers, and insiders are doing to gain better insights into a company's future prospects.
This is a real secret sauce, not because we're the only ones that can use the data... but because everyone else seems to ignore it.
That gives us an opportunity to track these experts closely and use their actions to time our investments.
The graphic below shows the five factors that the Power Gauge uses in the Experts category...
The first factor in the Experts category is the "earnings estimate trend." As the name implies, this factor doesn't just look at analysts' earnings estimates... It also takes the trend of the revisions and changes to those estimates into account.
It's a powerful signal when analysts revise estimates higher. It means that the folks who know a company best see a brighter future.
Next up in the Experts category is "short interest"... This factor looks at how much investors are selling the stock short at any given time.
As you probably know, "short selling" is when an investor bets on a stock to fall. To do that, the investor must borrow a company's shares and sell them into the open market. The goal, of course, is to make money as the stock falls... If that happens, the investor can buy back his borrowed shares for cheaper in the open market to cover his position – therefore making a profit.
The total percentage of available shares that investors have sold short is the short interest. A high short interest indicates strong negative sentiment about a company. These folks don't always get it right, but they do their homework... So a high percentage of short interest can be a warning sign for a stock.
Our next Experts factor is a crucial one – "insider activity." This factor looks at the buying and selling patterns of company insiders.
As you might know... executives, officers, and directors must disclose when they buy and sell stock in their own companies. And while they might sell for plenty of different reasons, there's only one reason they would buy... because they expect shares to move higher.
If several executives are loading up on shares, it's a strong sign that they believe in the company.
The fourth Experts factor is the "analyst rating trend." Much like the earnings estimate trend, this factor uses changes in analysts' opinions to glean insights into a company.
Specifically, analysts rate companies either as "buy," "hold," or "sell." Not only do we want to see strong ratings (mostly buys)... but we also want to see analysts becoming more bullish over time. In other words, the consensus is moving from either sell to hold or hold to buy.
If that's happening, it tells us that analysts are getting more excited about a company's prospects. That's a strong sign of future success.
Our last factor in the Experts category is "industry relative strength." With this factor, we don't focus on our specific company... Instead, we take a higher-level look at the entire group of companies in which it lives.
Say we were interested in Lennar (LEN), one of the largest homebuilders in America. We would want to see the company doing well, of course. But we would also want to see the overall homebuilding sector outperforming the market.
Simply put, we want to see the company's industry subgroup outperforming the overall market, too. That kind of positive momentum tends to continue... And it becomes a strong tailwind for a company within the industry.
Those are the five factors in the Experts category. Again, you can think of these pieces as the secret sauce of the Power Gauge. They're five factors that most investors miss entirely... But the Power Gauge is able to use them in a critical way.
Now, I realize we've covered a lot over the past few days.
In the past two essays alone, we've looked at all 20 quantitative factors that go into our proprietary Power Gauge. Again, those factors fall into four categories...
- Financials
- Earnings
- Technicals
- Experts
The Power Gauge pulls all 20 of these factors together and then puts out a rating for every stock on major exchanges – from "very bullish" to "very bearish."
The exact weighting of these factors in the Power Gauge is proprietary. That's why I can tell you exactly what goes into the tool with no worry of it being reverse-engineered.
Building the Power Gauge model was quite the undertaking...
But I couldn't be prouder of the final product and its ability to find the best companies in the markets that are primed for big returns. I also believe the Power Gauge is the best tool available to level the playing field between everyday investors and the elite on Wall Street.
This is Wall Street-level analysis... with Wall Street-level data... but provided in a simple format that everyone can use and understand. With access to the Power Gauge, you can plug in any stock... push a button... and immediately get the full breakdown.
I can't think of any better way to say it... It's truly the culmination of my life's work. And I'd love for you to allow me and the Power Gauge to become part of your investing journey.
Good investing,
Marc Chaikin
Editor's note: Marc used the "Power Gauge" system to predict the March 2020 crash... the continuation of the massive rally that followed... and four different stocks that could have more than doubled your money at the height of the pandemic. Put simply, if you want to "level the playing field" with Wall Street, you need to see his system in action...
For a limited time, Marc is sharing a free demonstration of the Power Gauge – using real-life bullish and bearish examples. In the past year alone, you could have made 100 times your money in just 11 months... join Marc to find out how this proprietary tool can point to exactly what's coming next. Learn more here.