Price trends are happening in all markets regardless of the type of market cycle at the time. Equity markets display an incredible dispersion of performance, which we seek to expose for our clients in our platform. We developed tools to capture a large part of the top trending performers and avoid a large portion of the bottom trending performers of the stocks asset managers are following. We can then measure the overall “Portfolio Rating” and any changes are pushed out to the manager via alerts. By raising the portfolio rating you improve the probability to generate superior returns. This allows active managers to outperform passive benchmarks that are simply relying on a mathematical combination of both winners and losers.
Active management can beat passive products, with the adoption of intelligent analytics and next-generation technology required to complement and strengthen their investment decision process.
Hortz: So you feel that concerted attention to the dynamics of stock price action should be an equal partner to stock fundamentals or be an overlay of some sort?
Pellegrinelli: We spent many years developing something quite complicated to gauge the magnitude of price trends and exposing the end result in a very simple and actionable manner — a “trend rating.”
For active managers who are fundamentally driven, they would still conduct their research as usual to identify potential securities to hold in the portfolio. Once selected, those stocks or ETFs can be quickly uploaded into a trend ratings and analytics program, such as ours, providing a variety of ways to enhance their decision-making process by employing this additional source of intelligence. Such data and analytics can help active managers determine if and to what degree fundamentals are disconnected from the price of the stock, as well as, help avoid “value traps.”
Furthermore, clients can use the filtering and ranking modules to identify new investment ideas, to overweight/underweight their existing holdings or as an enhanced sell discipline once they are alerted to downgrades in their portfolio. We also see a growing list of clients who use this tool to create systematic portfolios that are rebalanced by our engine. To sum it up, trend analysis easily fits with any investment style.
Hortz: How did you go about building your financial technology solution and analytic engine to accurately capture price trends?
Pellegrinelli: Our research and development team have 30 years of experience in researching and building models. I personally started creating my own models back in the 80s when the IBM PC only had floppy discs and there was no internet. I had to manually insert the closing prices from a hard copy of the Wall Street Journal into technical analysis software each day. I knew someday there had to be a better way!
Trendrating is the result of strong passion and a dream — to develop the best trend capture model for medium to long-term equity investors, not for traders. We tested 357 technical indicators across 25 years of daily data for 18,000 listed stocks on a global scale. After many years of robust testing, we identified a small number of indicators that were more accurate than the others and we combined them into a master model.
We ended up with a pattern recognition model which contains a self-adjusting algorithm. When the majority of indicators are positive there is a high probability of a bull trend. When most are negative then a bear phase follows a high percentage of the time.