Assessing Conventional Portfolio Analysis Methods

Regular followers of the Sinergi philosophy will be aware of the distinction about having “unlimited capital” being one of the few  scenarios where one can keep buying lower prices with the prospect of the market rising above your average price. Given that, in theory , something can go to close to “zero” and stay there. Ultimately, even this strategy is flawed.

There are many elements that make up a Fund manager’s “toolkit” in their decision making process. Some factors we would expect to see are listed below:

  • Global Macro Economic assessment
  • individual Company fundamental Analysis (Bottom up VS Top Down?)
  • Technical Analysis (Charting)

The common factor that exists for all three of the above methods is that they ultimately require some commitment in the form of  a decision on “Market timing” and, hopefully, an  interpretation of the risk reward for either a “Buy”, “Sell” or “Do nothing” strategy.

In this blog we will concentrate more on technical analysis as a primary driver of market timing. There is no doubt that a global macro economic assessment or fundamental analysis of companies assist the fund manager in positioning a portfolio to benefit from long term positive trends in economic sectors or ground breaking companies.

However, the degree of success is still governed by market timing, which brings us back to dealing with the “shorter term” and forms of technical analysis.

The Application of Technical Analysis in Short Term Decision Making

Fig 1 below is a regular OHLC (Open, High, low, Close) Daily Chart of the Equity Index future, the Estoxx 50 from the beginning of the year.

Avid followers of “Stochastic” or “Momentum” led analysis, falling in to the Charting group will, at some point experience the inefficiencies of monitoring persistent trends that suddenly reverse as was the case with this Chart (Fig. 1). Applying a general “momentum” measure we can identify:

  • A “Sell” decision point “B” where the Stochastics turned “Negative”  some -8.5%  in price terms below the peak “A”
  • A “Buy” decision point “Y” some +10% above the market low “X”.

What does this achieve (BY) or in price terms ( 2,300- 2,200)…. a window of gain so small (circa 0.45%) versus the whole Market range ( 2,600 high less 2,028 low) equivalent to an approximate 35% move. As an example this indicates that Stochastic only led decisions are the equivalent of a blunt instrument when faced with sideways markets. There is no statistically favourable risk/reward using THIS method all the time and only in ONE time horizon.

However, this “lagging indicator” is often favoured by Pension Funds who, using longer term moving averages tend to participate in a market in the mid to latter stages of a Cycle and are reluctant at using shorter term time horizons for fear of “churning” Portfolios. This can be effective because very large Pension Funds might be considered to have close to unlimited capital in relation to their specific individual liabilities.

To understand more, we would highly recommend Chapter2  “The Illusory Validity of Subjective Technical Analysis” by David R Aronson in his book Evidenced Based Technical Analysis.

 Fig 1













So Where Next if Your Portfolio Does Not Overwhelm Your Immediate Liabilities?

We believe that you are faced with a greater responsibility to manage or consider market timing as a factor in your long term growth strategy. Looking at recent weeks, we are faced with key questions:

  • Is the rally  in the Estoxx 50 from the June 20 – 29 low over? or merely a retracement ahead of stronger prices?
  • Is the fall from the recent 2607 High the beginning of a new negative trend and are further falls expected?


We are NOT Chartists but we understand that a picture tell 1,000 words so for the more  avid Charting technicians………… it just an a,b,c   Elliot Wave Analysis retracement? (see below)


Ellliot Wave-example of an a,b,c, retracement


The honest answer is that NOBODY knows for sure and it would be foolish to deduce a conclusion of any claim of certainty. With the benefit of hindsight, of course, its always easy to say what it was rather than what its going to be!!

Sinergi – The Changing Face of Market Analysis

Sinergi combine 20 yrs of Systematic Trading knowledge and our latest advance in the application of software, Qlikview, to filter through billions of sets of data to make sense of this financial noise.

Where we differ from Charting strategies is that every market or instrument has, in layman’s terms,…a “personality”. Each series of prices behaves differently and furthermore this behaviour can change over time. One of the key determinants of this “personality” is “Volatility” or “the rate of change in price over time”.

Our dashboard analysis takes into account the changing face of volatility to optimise the interpretation of the price behaviour. In effect we are more able to qualify the nature of price movements that the broader measures of momentum employed in stochastic analysis. 

The Solution – Back Testing and Increasing the Sample Size of Data

Bizarrely, the answer, or more appropriately, the preferred outcome is to expand the analysis from a single  Chart eg : “Daily” and to actually increase the amount of data under review by looking at the second derivatives of other time horizons.

What does this mean for the uninitiated? In effect we use momentum analysis for various time scales to give us a better picture of any particular time scale.

Most market participants fail to do this and OR “back test” their results, relying on the “If it worked once then it will work again.” strategy.  The Chart above shows it doesn’t and that it is “illusory”.

We drill down from a Daily bar Chart to an Intra-Day Chart to see that the recent fall in the Estaxx 50 index can be assessed with much more confidence and detail (see below). We have identified 2,411 as an area where the price could fall to and yet the Daily trend would still be Positive so this would statistically be a “poor” place to Open a fresh “Short” position.

Conversely, 2,540 is a level where the Price could rally to but it would NOT be statistically an optimum price to open a fresh “long” position.

Knowing What NOT To Do Can be Very Important.

As we have said in the past. Knowing what not to do is the starting point for Sinergi trend analysis, price points and portfolio modeling.

Being able to identify in advance the prices that suit your objectives while minimising your risk automatically filters out many potentially poor decisions based on emotive or herd instincts.

Going further and replacing such decisions with confidently knowing the  actions that you will take in the circumstances then becomes a very powerful tool.

All of our analysis and dashboard content across asset clases, markets and sectors is underpinned by the consistent and disciplined application of these principles.

Take a Closer look HERE








Keith Reid
Keith Reid
Keith’s training as an accountant and auditor has emphasized the importance of evidence in all good decision making process. The ability to monitor management processes effectively is a key to making the most of business opportunities. Both Keith and Gerry believe that this priority for capital preservation is the common principle that sets the framework for any sound investment strategy or business model.