Most individual and professional investors would agree that the day-to-day twists and turns in the stock market, and the intraday volatility, have significantly increased over the past few years. There are many reasons for this, including the surge in computer-based algorithmic trading, which now accounts for more the 80% of daily stock market volume, and the influence of micro-investing via firms like Robinhood. And I’m afraid this change in the market’s character may be the “new normal” so we had better get used to it.
Whatever the reasons for these changes in the market’s character may be, current conditions have certainly made it more difficult for investors to navigate and manage their stock market portfolios — and maybe more difficult to sleep at night. Managing day-to-day market risk is more challenging than it’s even been in my career and, amid these conditions, your emotions are often your portfolio’s worst enemy.
Personally, I have dealt with these treacherous market conditions by relying much more on data-driven quantitative models — more than I ever have in my career — and much less on my own personal observations and opinions on the market. This data-driven, more mechanical approach acknowledges that I can’t see or predict the future, regardless of my experience. But it keeps my emotions and opinions and ego out of the equation and keeps me performing the same way every day, for myself and my clients, regardless of what is happening around me.
One of the quantitative tools I use to do this is called The Asbury 6, my firm’s in-house, data-driven daily assessment of the internal health of the US stock market. I think of the “A6” as the stock market equivalent of a routine office visit to your family doctor, which typically includes a shortlist of routine evaluations of your health that typically includes taking your pulse, checking your blood pressure, taking your temperature, etc. This battery of simple tests enables your doctor to to establish a baseline assessment of your current condition and, from there, he or she can can elect to send you on your way, request additional testing, or send you to the hospital. In the same way, the Asbury 6 checks the internal health of the US stock market.
The Asbury 6, by design, includes only one price-based market metric. The other five are what I call secondary indicators; things like investor asset flows, which indicate investor conviction in a bullish trend; trading volume, which indicates investor urgency to buy or sell; and corporate bond spreads, which measure the bond market’s assessment of credit risk. Because computers have taken over the day-to-day trading activity of the stock market, I have stacked the “A6” with non- price based metrics to act as a lie detector test to help thwart the near term misdirection that has now become a part of the risk in investing in stocks.
The table below shows that the Asbury 6 is currently bullish as five of its six constituents are showing a positive reading. Four or more metrics in one direction, either positive (green) or negative (red), indicate a tactical bias.
As long as the “A6” remains bullish, our offense is on the field: that is, we remain invested and are looking for opportunities to increase exposure. When the “A6” turns bearish (four or more negative constituent metrics), however, we shift to a defensive stance: that is, we are taking inventory of exactly what our equity exposure is and what we own, are tightening protective stops, and generally looking to protect our capital.
The Asbury 6 is Asbury Research’s tool to get a daily assessment of the market’s health, but it is certainly not the only way to so this. Both professional money managers and individual investors can construct their own version of the “A6”, based on their own market knowledge, experience, investment time horizon, and favorite metrics that they understand and which resonate with them. The important takeaway is not which specific methodology and individual indicators you use, but rather having a data-driven, repeatable methodology so you can be consistent in your approach and keep your emotions from sabotaging your performance.
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