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Research Methodology: Higher Returns with Less Risk

All of STIR’s research is based upon 4+ decades of market experience: 2 secular bears, 2 secular bulls and 30+ cyclical bull and bear markets. Markets move in cycles, so do asset classes and sectors, and leaders outperform laggards. STIR focuses its research on owning the leading sectors/asset classes in rising markets that will boost returns, avoiding the lagging sector/asset classes that will drain performance, with the ability to change along with the market’s direction and leadership: higher returns with less risk.


STIR’s research is presented within 40 quantitative rule based model portfolios. Models outperform forecasts and human emotions (qualitative) because they religiously and consistently apply the same experienced time tested trading rules time after time. Most money managers believe they have keener insights and superior intelligence (qualitative talents) that will allow them to outperform the market, but history has demonstrated that routinely 70% fail to outperform the market. In contrast, STIR’s research model portfolios, over a full market cycle, have consistently delivered higher returns with less risk (see Risk/Reward Scatter grams).

How many Wall Street market strategists predicted and avoided the -50% losses during the “Great Recession” of 2007-2009? Not many, however, STIR’s rule based risk management turned bearish in early November 2007 and remained in that mode until early June 2009, thus avoiding significant losses. And how many economists or forecasters predicted the 30% gains in 2013 and participated? STIR’s sector rule based research participated and kept the models invested in the leaders. As two examples: the sector models ended the year with gains of 45% for the Sector Growth Index and 75% for the Ultra Sector Index. Just several examples of the advantages of rule based model portfolios versus emotional market investing.

Rule based models provide history; therefore, you can study and understand the ups and downs of any portfolio strategy. You can review long-term performance and find a model strategy or group of strategies that may fit different investment profiles. (STIR provides a Monthly Historical Data Analysis for our subscribers). By studying history one can be better prepared for the future, by knowing the past parameters of a model there is less chance of being uniformed and panicking in the future.


STIR’s research follows Ockham’s razor, “what can be done with fewer assumptions is done in vain with more”. STIR has found this to be extremely true in investing. We have sat through lengthy complicated detailed explanations of market strategies, with exotic names like “risk budgeting”, only to watch them collapse in real time. Too often we believe that it has to be complex to succeed, that simply is not true.


STIR’s analysis employs up to five different time tested quantitative rule based ‘tools” in building each of its research model portfolios with the same goal: higher returns with less risk. STIR’s research is primarily equity oriented, from conservative to very aggressive, using ultra or short funds/ETFs, however the research includes several bond models.

Investable Universe

Each research model has a preselected universe of funds/ETFs to select from. The number of funds/ETFs varies depending upon the goal of the research model or restricted by the investment platform. Many models focus just upon asset classes, others only sectors, or on country specific funds/ETFs and many combine all in the analysis.


The goal for each of the research model portfolios determines the investable universe STIR’s analysis will cover. As examples:

  • For the Sector Growth the universe encompasses 13 growth sectors/industry groups. While many more sectors exist, the universe was reduced to only those sectors that have demonstrated superior growth in past bull markets avoiding defensive sectors that normally lag.

  • The ETF International model’s universe is 70+ country or region specific ETF’s.

  • Other research models may just have basically one primary asset class, like Emerging Market Bond, where the model is either invested in the bond or in a defensive cash position.

  • By reviewing the fact sheet, a summary of the STIR research model, one can see the size of the investable universe.


The majority of the research models are broadly diversified and has predetermined diversification rules.

Relative Strength Analysis

Within the models universe of funds/ETFs the goal is to own the leading asset class or sector fund/ETF that will add to portfolio performance and avoid the laggards that will only drain performance. While the ‘market’ is just an average of the performance of all the asset classes/ sectors within in it, not all are performing the same. Over a quarter, a year, etc, there will be a big difference between the leaders, the market average and the laggards.

This example is typical, not that the market goes up 32% per year, but the ‘spread’ or difference between the leader and laggard (within asset classes or sectors or country specific funds) is typically large.  Historically, the spread between the laggard and leader has ranged from lows in the teens to three digit highs! And therein lays the investment opportunity.


Unlike a fixed allocation, which will own all of the asset classes or sectors, an active strategy will seek to gain a performance advantage by allocating its assets to the leaders while avoiding the laggards. The fixed allocation will ride the ‘market’ up and down, going with the tide of the market. STIR Research’s active allocation seeks to identify the leaders and participate in their over performance.


Numerous academic studies have determined that 80% to 90% of the performance of a portfolio will be determined by its asset allocation, which makes sense, and that is why STIR’s research strives to own the leading asset classes that can add to performance.


The two very different examples using different investment universes (sectors or internationals) demonstrate that during different bull markets leadership often changes. What was leading in one bull market does not always lead in the next. Second point, the leaders significantly outperform their benchmark, so “Why own the whole market when you can own the market leaders!” With part of STIR Research goal being ‘higher returns’ it is important that our research models seize on the rotational investment opportunities.

Relative Strength Analysis (RSA): Persistent in Price


Understanding there is rotation in leadership, how can we identify the rotation when it occurs so we can participate in the gains of the new leaders? Fortunately, there is ‘Persistency in Price” often referred to as ‘Relative Strength” or ‘Momentum”: what is leading continues to lead, and what is lagging continues to lag.


Many Wall Street Maxims support the principle of Persistency in Price: “don’t fight the tape”, “Cut your losses and let your winners run” or “Make the trend your friend”. All these Wall Street maxims mean the same thing---- bet on price momentum. Many studies, books, articles, etc have been written on this subject (Marshall did a presentation at the International Statistical Conference in Salt Lake City on this subject). But to illustrate the point, James P. O’Shaughnessy did one of the longest studies, which illustrates the power of Persistency in Price in “What Works on Wall Street”.


Over a 83 year period, out of a universe of thousands of large stocks, portfolios were built of the top 10% leading stocks or the bottom 10% of lagging stocks over the past 6-month and held each for the following 6 month period. The results were dramatic, leaders continued to lead significantly, and buying the losers, turned out to be a losing strategy.

















Relative strength adds tremendous value; it identifies the leaders that can add to over performance and is one of the key quantitative tools used within STIR’s research to achieve the ‘higher returns’ part of our research goal.


Risk Management


However positive we are about this being a new mega rising market (secular bull) we are very aware that it will be interrupted by periods of falling prices (cyclical bear markets).  Capital preservation is a key to success in an actively managed strategy. If you lose less of your hard earned profits during the inevitable decline, you will have more capital to grow in the next rising market.

As a recent example, during the horrific bear market of 2008-09, many fixed allocations fell by -50%. Therefore, the next bull market gain of +100% from 2009-2011 was entirely needed just to get back to asset values of where they were before the 2008 bear market began. Not only was it costly in money and lost time, but the roller coast ride was hard emotionally.


In contrast, STIR’s active rule based risk management strives to lose less during these inevitable market declines. If the loss had been contained at -20%, the next 100% rally, only the first 25% was needed to get you back to being whole. The remaining 75% of the advance would be spent earning new profits, not recouping losses. 


STIR uses two quantitative risk management tools in our analysis to achieve the goal of higher returns with less risk: Individual Fund Signal and the Market Environment Indicator.

Individual Fund Signal

Risk management is the key to achieving the 2nd half of the STIR goal of “Higher Returns with Less Risk”. It is also valuable in keeping our research models invested and participating in market advances. One of the quantitative tools we employ is the Individual Fund Signal (IFS).


Each asset class, sector or country specific fund/ETF marches to a different drummer. The goal of our IFS signal is to identify the trend for an individual asset class, sector or country specific fund/ETF. Also the math (quantitative analysis) behind each IFS can be quite different between asset classes, etc. As an example a broader based fund/ETF like Technology or S&P 500 Index will have a longer-term signal than a more targeted fund/ETF like Internet or Large Value. The IFS signal is tailor made and time tested for each asset class. The founders of STIR Research were one of the first strategists to begin using IFS signals back at the start of 1990.























Example: Emerging Markets over an 18 month period, utilizing its tailored IFS: 

  1. The IFS generated a sell signal for Emerging Markets on 6/27/08 and remained bearish until 3/26/09. Over that nine month period Emerging Markets dropped 40% in value, something everyone would have wanted to avoid.

  2. On March 26, 2009 the IFS generated a buy signal, and the Emerging Markets ETF (EEM) rose 60% over the final 9 months of 2009.


In keeping with the STIR Research goal of “higher returns with less risk” that is exactly what was achieved. By employing IFS we were able to achieve a 60% return with very little drawdown versus a buy and hold (hope) which would have produced a rollercoaster ride of down over 50% only to have all the gains from the rally back to get you where you were when you started (lots of risk and little reward).

Market Environment Indicator

The STIR Market Environment Indicator (MEI) strives to identify the intermediate term direction of the equity market. Weekly the MEI measures the trend and momentum of +100 sectors and industry groups (S&P/MSCI Global Industry). Trend is a measurement of the direction of the sector or industry groups moving average. Momentum is the measurement of the rate of change (up or down) of the sector or industry groups price index.


By combining over 200 indicators measuring trend and momentum of all the underlying moving parts of the market, we believe it gives a more timely and accurate view of the market’s direction and health than simply looking at one or two indicators. No indicator is perfect. It is impossible to sell at the exact top or to buy at the exact bottom. A successful risk management indicator is one that:

  • is right more often than it is wrong,

  • and more important, when right it leads to participating in large gains (2009-2010) or avoiding large losses (like 2008), and when wrong, the losses are small and quickly reversed.


In our opinion, the Market Environment Indicator has proven to be a successful risk management tool. The MEI follows the old adage of “don’t fight the tape”; it keeps us in trend with the market.

Ultra Funds

In a new secular mega bull market the investment winds will be at our back, pushing stock prices higher, much higher. A mega bull will present many opportunities. One of the great advantages of a new mega bull market is the majority of the time is spent creating new wealth.  In the last secular bull market over 75% of the markets time was pushing into new high ground. Translation: 77% of the time your portfolio, your 401k account was growing in value. It was working for you.























During a secular bear, the market does rise over 60% of the time, but that is all in an effort to make up for prior market losses. No real gains. Secular bull markets are a breath of fresh air. New wealth is being created. “Make hay while the sun is shining” is a great proverb and certainly applicable to conditions today. Secular bull markets offer a rare opportunity and another way to magnify that is to employ Ultra ETF/funds.


Judiciously using Leverage: Leverage can add great value or destroy value. Therefore leverage should be used with good judgment, implemented prudently only when market trends are favorable before taking action. Think of an experienced sailor choosing to employ a spinnaker for additional speed: The spinnaker fills with wind and balloons out in front of the boat when it is deployed, called flying. A spinnaker is only used in ideal weather, a great tool, but never used during adverse weather.


The same with the Ultra Market Leaders Index and Ultra Sector Index, leverage like the spinnaker, is only to be deployed under the most advantageous situations.


While the Market Leaders and Sector Growth Indexes (using no leverage), it would be a mistake to take that index and to simply say ‘let’s just replace the asset class index funds (1X) with ultra asset class index funds (2X)’.  You need to add leverage judiciously, only when conditions are most favorable.


Therefore we added another ‘risk management’ indicator to the Ultra Market Leaders and Ultra Sector Index, the individual fund signal (IFS) or market environment indicator (MEI), explained earlier.






















The rule based Ultra Market Leaders and Ultra Sector Indexes combines decades of risk management experience. How do we combine the IFS (Individual Fund Signal) and MEI (Market Environment Indicator) to tell us the most opportune time to be invested (1X), or move to leverage (2X) or to be out of the asset class all together and in the safety of cash? The answer is a two step process:


  • Looking at the IFS on a daily basis to determine if the chosen asset class or sector is on a buy or sell. If on a buy, take a 1X position purchase an index ETF or fund that corresponds to that asset class. Hold that position until the IFS signals a change in trend. On a sell signal by the IFS, sell the ETF/fund and move the proceeds into a defensive position, either money market or aggregate bond.

  • Monitor the MEI on a weekly basis. When the MEI’s trend and momentum is bullish, on an overall market buy signal, move all current buy recommendations in step 1 from a 1X into an ultra fund (2X) within that same asset class. If the MEI had been bullish, on a buy signal, and moves to a sell signal, immediately sell all ultra funds (2X) and move back to a 1X in the same asset class.

The IFS is the foundation, this signals to the Index if the asset class or sector should be bought or sold. The MEI only signals when it is okay to use leverage. If the MEI is bullish (on a buy signal) and the IFS is on a sell, the IFS is the overriding signal.


The following chart of Emerging Markets (EEM) shows the rule set at work.

  1. The IFS gave a sell on 6/27/08 at $40.79, moving the position defensively into cash.


  2. The MEI turned briefly bullish (buy signal) in August, but with the IFS signal bearish, no action was needed or taken.


  3. On 3/26/09 the IFS gave a buy signal for EEM at $24.30, at which time an index fund should be purchased (1X).


  4. On 6/1/09 the MEI turned bullish and with the IFS bullish following the rule set, the Emerging Markets Index fund (EEM) would be sold and replaced with the Ultra Emerging Markets fund. Both the IFS and MEI remained bullish for the rest of 2009.


  • The IFS kept the allocation out of harm’s way (6/08-2/09) and avoided a -50% swan dive.

  • The IFS signaled a change in direction with a buy signal on 3/26/09 and had the index participating in a great rally of +60% by year end.

  • The MEI turned bullish in early June, giving the signal for clear sailing and therefore the go ahead to use leverage because the IFS was also bullish: that added another 22 percentage points in additional performance by year end, 82% versus 60%.

  • A Buy and Hold of Emerging Markets would have shown a -5% move after 18 months, with a roller coaster ride and a lot of emotional pain to achieve that loss.

  • Following just the IFS risk management indicator would have avoided the swan dive and produced a 60% gain.

  • Combining the IFS and MEI for leverage, magnified the move in the last half of 2009, showing a gain of 82% by year end.

Summary: Research Methodology: Higher Returns with Less Risk


Each STIR Research model portfolio has a summary fact sheet (found within the research group and Aim Higher Index tabs), along with historical performance and other data, it has a summary chart of the different quantitative tools used within that research model. (an example is below). That summarizes our analysis process.

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