From Harry Dressler, MBA, M.Ed - Portfolio Manager

IMPORTANT ANNOUNCEMENT  the Portfolio Voyeur content is being transferred to 

                                                            CHAOSPORTFOLIO.COM!



CHAOSPORTFOLIO.COM WILL PRESENT A NOVEL APPROACH TO UNDERSTANDING AND MANAGING INVESTMENT PORTFOLIOS USING A PROPRIETARY BEHAVIORAL ANALYSIS THAT IS BASED UPON CHAOS THEORY, A MATHEMATICAL THEORY THAT PROPOSES THE CAPITAL MARKETS ARE NON-LINEAR, MEANING CHAOTIC AND UN-PREDICTABLE.

YOU'LL NOT WANT TO MISS THIS ANALYSIS AND COMMENTARY FROM HARRY DRESSLER, TRAINED WITH AN MBA IN iNTERNATIONAL FINANCE AS WELL AS AN M.ED. IN CLINICAL PSYCHOLOGY.

THE CHAOSPORTFOLIO.COM IS COMING SOON!!!!!! STAY TUNED!!!!!!!



THIS IS NOT YOUR GRANDFATHER'S PORTFOLIO:

The latest  permutation of market theory is behavioral. Academics believe that the investor's behavioral characteristics are important to understand and have an impact upon portfolio returns. This latest in a series of academic approaches is another attempt to tame the beast. There are as many approaches to understanding the capital markets as there are stocks listed on the   NYSE exchange. None have consistently proven dependable. Why is this?

Each theory has been an attempt to characterize what cannot be characterized, to measure what cannot be measured, to forecast what cannot be forecast. There is an old proverb that says "Man plans, and G-d laughs."
What is happening here? Well any psycho-emotional or psycho-social theory intended to "understand" the capital markets is an attempt by investing humankind to comprehend and in some way influence a non-linear, or random, chaotic mathematical system. The capital markets cannot be influenced by investors (at least not legally), they are influenced unexpectedly by deviations from what is expected, by systematic or systemic risk. 

It seems FEW ARE WILLING to accept the basic and evident fact that the capital markets are non-linear in a mathematical sense. That they cannot be forecast. Benoit Mandelbrot, a well known chaos theorist, physicist and mathematician, did not believe that the capital markets could be explained within a neat little mathematical system, a neat little bell curve in his case.

No system, not even Modern Portfolio Theory, for which Harry Markowitz won a deserved Nobel Prize, is able to fit the data to the model, i.e., MPT is no more efficient at returning a positive absolute return than throwing darts at a chart.

Dressler's Chaos Theory of Portfolio Management makes no attempt to outguess the markets. The theory disregards every current theory, especially technical approaches that utilize "indicators" based upon historical data. Such indicators that measure trend, strength of trend, overbot/oversold status, moving average oscillators of all kinds are abandoned. The Chaos management approach does need data and charts will be used but very basic ones as we shall see.

Dressler's  Chaos Theory of Portfolio Management deletes or minimizes the human factor altogether in asset selection. Using the most basic of metrics in a proprietary buy/sell system, the theory seeks to let the market select the asset allocation and the entry/exit timing. The human element is reduced to simple observer.   The concept is to let the capital market(s)  set its own portfolio allocation, rather than rely on a human to pre-set it.

The chaos portfolio system does include a sell discipline framework in that no position can exceed 4% of the portfolio as a risk management decision built into the program. This is simply prudent. Fully invested, the portfolio will have 25 positions. Both domestic, global and international ETFs are included in the selection universe.

This website will track the performance of the chaos driven portfolio management theory by keeping a weekly listing here of market selected investments (ETFs) and their performance compared to several normally accepted benchmarks or indices. 



WEB NOTES:

We will post weekly selected ETF percentage gains and losses versus standard indices every Friday at the close. These will be archived on Page 2 (Archives) along with the weekly commentary.

COMMENTARY:

ADP employment numbers surprised to the upside  on Thursday, reporting the U.S. economy added 297,000 private sector jobs.  While market indices moved higher, mid-day pundits questioned the validity of ADP as a predictor.  CNBC hyped the number all week. Talk about neurosis. Well, in fairness to CNBC they have to fill a lot of time with a lot of conversation. They shouldn't be blamed, just understood. The are like family to me, but we'll save that issue for my analyst.

Quote of the week "Don't listen to anyone."

This uttered by Jesse Livermore, the most famous trader at the turn of the century and circa Depression times. We believe this advice is especially valuable today with so much contradictory data circulating 24/7.

On Friday morning, the December non-farm payrolls were released. The forecast was expecting 175,000 jobs added. The actual number of jobs added was +103,000 jobs, well below expectations. The unemployment rate decreased from 9.8 to 9.4

Let's understand this clearly. Economists are not expected to forecast a future event, they are expected to calculate jobs added or deleted in the previous month. Certainly, a calculation is far different from a forecast.
If economists cannot calculate correctly, based upon diligent research methods on jobs added or deleted, then how can we expect any clarity in their forecasts? 

Adding insult to injury, the employment numbers will undergo their normal "revisions." The October numbers were revised from 38,000 to 70,000 (a gain of 32,000 jobs). The October revision is an 22% increase.

The November employment report was +39,000 jobs an was revised upwards in December to 71,000 jobs, an 84% increase of 32,000 jobs.  Aren't people embarrassed to even discuss the irregularity and obvious inaccuracy of these calculations?  

Of course the market didn't know how to react, so it rose only to reverse down. Pundits blamed the downdraft on a Massachusetts court ruling adverse to the banking sector. The court reportedly ruled against two foreclosures putting downside pressure on banks, especially  US Bancor and Wells Fargo who were involve in the case. 

So what does this mean to us who believe the markets cannot be forecasted? How do we insulate ourselves from the intra-day volatility that leaves the pundits scrambling to make sense out of nonsense?

We simply filter out the noise by relying on weekly data, not daily data which is built on quicksand if the employment revisions are taken as an example. In mathematical terms we " increase the scale."

The  S&P 500 index 1 year/weekly data chart below ignores the anxiety of our goofy Friday data. The week actually shows a different picture.



 
The S&P 500 index shows a clear uptrend that experienced a November pull-back. The uptrend recovery has continued
to the 1250 plus level. Trading above its 10 week moving average, the S&P appears to be suggesting a slow but steady economy.

Given that the .VIX, The S&P Volatility Index, is at an historically low level, 17.4, the markets are generally complacent.

The first week ends positive for the S&P 500, a benchmark for many portfolio managers. Next week will bring volatility
in both positive and negative directions, as companies report earnings.