Bringing Technical Analysis into Value Investing

Though I’m a strong believer in the fundamentals, and will die by the principals that fundamental investing works the best, I do have to admit that there are some virtues to technical investing. This is especially true when we look at how technical analysis can help us build and maintain our more fundamental and value based strategies.

The Trending Value has a very simplistic editor. Basically, for a company to pass, they just have to have a market cap of greater than 15% of the companies within the universe, and have an O’Shaughnessy VC2 score of greater than 90% of the market.

The majority of the strategy is focused on this formula here. There are a total of six variables, each that looks at the underlying fundamental ratios that evaluate the success of a company from an accounting standpoint. Just remember, that when putting this formula into your strategies, the higher the number the better.

Outside of the editor, we have a cap of 25 stocks for how many positions this screener can produce. In order to catch some long term momentum – bringing that more technical aspect in – we order the results by the change of close over the past 6 months, and only the top 25 best performers are made as suggestions.

With a monthly rebalance during the first week of the month, the strategy averages over 20% annually since 1995. The standard deviation is a bit higher than something I would typically like, and there are a few amazing years that help shoot this strategy to the stars. Typically, I’d eliminate these years from the overall pool, but this screen had multiple 50%+ years, and eliminating those may actually hurt the data more than normalize it.

Looking at the breakdown by year, I’m feeling like I should have gone with this for my investments last year rather than the portfolio that I did have.

I know I mention the Sharpe Ratio in most every article where I discuss a screen, but there’s good reason for that. By using the Sharpe ratio you know whether or not the risk is worth the reward.  There’s a pretty good chance that your screen is more volatile than the overall market. As a result, make sure you’re making enough from that screen to make the added volatility worth it. If it isn’t, you should simply invest in an ETF.

Thankfully our Trending Value screen has a significantly higher monthly Sharpe ratio than our benchmarked S&P.

Overall

Though it doesn’t implement a lot of technical aspects, there is still a lot of room for improvement.  Whether that’s adding more lines to the editor, stop losses, stop gains, or even adding a trading model to dictate how the screen trades over the period of time. None of these screens are set in stone, and many of them outside of the featured screens tab should be treated as a starting point rather than an end all investment strategy.