Ep. 293 Taking Out Emotion: How This Investment Advisor Applies The IBD Methodology In Trading
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Hello and welcome to another episode of the Investing with IBD podcast. It's Justin Nielsen here, your host, and it is Wednesday, October 30th, 2024, and we are coming to you live as we always do, 2 p.m. Pacific, 5 p.m. Eastern on Wednesdays. So glad to have you here. And also,

If you are watching this live on YouTube, don't forget to like and subscribe. That helps us out a lot. It gets us a little bit more out there and on people's radar.

We've got a lot to talk about today. I mean, we've got Halloween around the corner, but probably more importantly, we've got a lot of earnings, an election, and to help us kind of muddle our way through this and take the emotions out of a lot of this equation is Don VanBoord. Don has been, well, your Chief Investment Officer at Revere Asset Management. You've been following the paper for over 20 years now and kind of the

the IBD methodology and it kind of got you to where you are. So welcome to the show for the first time, Don. This is great to have you on IBD Live. You came to our Founders Club just recently in Las Vegas, and it's good to have you on the show.

Great to be here. Looking forward to a great discussion on the markets as we muddle through them emotionally, as you said. Yeah, it's been tricky, you know, and I will say, I mean, earnings certainly has been one of the factors that I think have been putting people on...

on, on pins and needles, but, uh, look, you know, the election before that, it was the fed inflation, uh, will they, or won't they, I mean, it was, uh, more than a, more than a friend's episode with Ross and Rachel in terms of when those cuts were going to happen. Um, so yeah, there, there, there's kind of a lot that we had, uh, had to kind of digest. And now that we're kind of

almost to the end of, I think, a lot of these fears. I guess a lot of people are wondering what to do. Let's maybe start out with the NASDAQ composite.

Here we are. I mean, we're we're right there at highs. It was it's it's the Nasdaq has been kind of lagging a little bit. The S&P 500, you can see that with the relative strength line. But lately, it really seems like it's kind of perked up and said, hey, you know, don't forget about me. I'm still here. What's what's your take on the market right now, Don?

Exactly what you said. Look at the move up towards two o'clock in the relative strength line over the last week. And it seems that interest rates in the dollar, more interest rates than the dollar, but since the Fed cut, interest rates on the long end have gone higher.

And, you know, growth companies don't like high interest rates, or I should say the market doesn't like growth companies when interest rates are ticking higher. So the small cap index, if you want to bring up IWM, was consolidating nicely last week and then three days down to the 50 day moving average.

Bounced at the 50-day moving average. Was looking strong early today. Had a negative reversal late along with basically the rest of the market. And note the jagged RS line on that as well.

you never know what the market's going to throw at you, but you don't even more so, you don't know how the market's going to react to what gets thrown at it. And one thing we do know is the pristine balance sheets of the Mag7 rise in interest rates doesn't seem to bother those names. Who needs that when you're sitting on a pile of cash, right? Exactly. And no blow ups out of those stocks from their earnings we've had.

Google yesterday, Microsoft and Meta today. Tomorrow we have Apple and Amazon and then Nvidia, Tesla as well. Oh, yeah. A huge turnaround.

on its earnings report. And that's one of the names we'll talk about in a little bit. Yeah. So, you know, one of the things I guess, you know, the, the, the mag seven trade certainly was something in 2023 that was kind of all the rage and to a certain degree,

It feels like it's a little bit gravitating towards those mega cap companies again, because, I mean, you look at RSP, which is the equal weighted S&P 500, and this doesn't look nearly as strong. We've had a little bit of a downward turn in the relative strength line there, too, kind of suggesting that if you equal weight everything in the S&P 500, you're not going to do nearly as well as when you put more money into those market cap companies.

uh exactly and that was after a big move up in the relative strength line on the rsp back in july uh going into august um again you just you just never really know what the reaction is going to be and it's difficult to keep up with all the twists and turns uh within the various sectors within the s p 500 not to mention the uh big disparity in the market caps of the names that are in there yeah right now i will say that on the

you know, on the NASDAQ 100 at least, QQEW was looking a little bit better. But, you know, that kind of turned tail a little bit today back below the 21-day moving average line. But, you know, again, the markets did come in a little bit, you know, today. You know, is this a concern for you when you start seeing, okay, we're trying to get to new highs and, you know, it's kind of a little hesitant there?

If you bring up a 60 minute chart of the S&P 500, and I'll tell you why I'm not concerned. Okay, S&P 500 and we'll go 60 minutes. So you can see, look at that 57.67, 57.65 back to the left.

We broke above that level and basically we're in a 16-day consolidation. We pulled back last week that big spike down to 57.62 and tested it and bounced right there. And the way we resolve out of this, now it's now 16-day consolidation, we resolve up and, you know,

consolidation should resolve in the direction of the primary trend, which is up. If it doesn't, if we break back below that 5760 ish level, then the market's not ready. I hear a lot of people saying, you know, we're in the seasonally best two months of the market. But when everybody agrees on something, the market has a tendency to do the opposite. Right. And really what we've seen October while we've churned sideways is

is growth leaders have outperformed the indexes. And we can tell this by the performance of the individual growth names that we have in our portfolio. Sometimes we the index half and I'll talk about the way we construct portfolios in a little bit, but sometimes the index carries it and leading stocks are not in favor. But this month of October has certainly been a good month for leading growth type names. Yeah, perfect. Well, you know,

Don, you focus a lot on the market and that's one of the main components of your style. In fact, a lot of times you will look specifically to invest in ETFs. So maybe you can kind of walk us through some of your reasoning behind that. And I know you brought some slides to kind of share here and we can start with maybe the...

the downside, the bear markets, their recoveries, and why you need to kind of be aware of that and, you know, how you handle that.

Sure. So I have an IT background. I was in IT for 25 plus years. And back in 2000, this is a kind of a sad story, but my father-in-law was dying of cancer and he had his portfolio at one of the big brokerage houses and he got destroyed. It was tech heavy. They never sold. He lost half of his money during the tech bubble crash. And I

i got involved in investing right around 1999 leading up to 2000 and you know confused the genius uh from late 99 and early 2000 with the bull market i didn't have a cell discipline at the time uh and i gave back most of of what i gained uh but i um

I'm a very competitive person and I attempted to determine what went wrong and how can I avoid it again in the future. And really, I came across IBD and loved the fact that a lot of it was quantified. One of the sayings from my IT career was you can't manage what you can't measure.

That follows through to the way we manage portfolios at Revere. I kind of caught the market bug and I knew when I got out of IT, I wanted to somehow get into the business of asset management for people with downside protection because it just makes people

Common sense. What what other aspect of your life if it's going badly, do you not take corrective action? Right. But Wall Street has a huge conflict of interest. They don't make money unless you're buying their mutual funds and their products. So they don't want you to ever sell.

But with a few simple rules and really it's the M in canceling. You just apply that rule and that'll keep you out of individual names. And then all bear markets, if you want to show the bear market slide. Right.

Those all occur below the 200 day moving average. So if you can manage to stay away from the huge bear markets and protect your capital and wait for buy signals to get back into the market, it seems like you should be able to compound your capital from a much higher level than if you suffered the 30, 40 or plus percent drawdown. And they're going to happen again.

um but we've had an extremely lucrative uh 12 months now basically the big follow-through day back in the first week in november of 2023 a very lucrative one-year period and um we don't want to give that back and uh we've got rules we explain them every night we do nightly videos at revere we go through what we're owning uh in our portfolio and um

can quantify where we are at the market cycle and where we will be if the market turns and we need to get more defensive and how much we'll be protected on the downside. We really strive to stay within 10% of our equity curve, all time high. Think of it as driving from

If you're looking at a map of the US, you want the equity curve to look like you're driving from Arizona up to Maine without any detours down to Texas or Louisiana. So nice, smooth trending equity curve is what we strive for. And it's especially key as your nest egg grows in retirement approaches. You have to preserve capital because of the sequence of returns. You never know when those bear markets are going to hit you. And if they hit you right as you're approaching retirement, it's difficult sometimes.

to recover from. One of the saddest things is seeing people that should be retired bagging groceries because they lost in the market and had to go back to work. That's just not something we want to experience. And we've got rules in place and discuss it every night for our clients. Well, and one of the things that this slide really kind of emphasizes is just how much

the math starts working against you. You know, once you get in a hole, you know, and of course, if you look at the extremes, you know, you can go back to 1974, the 2000, you know, dot com bubble crash, the financial crisis, you know, these these time periods where you're down more than 50 percent.

And how that requires 100% just to get back to where you were. So if you can, as you said, if you can limit that to 10%, that's a lot easier to recover from and start making progress again, as opposed to having, you know, a lost decade or, you know, what have you.

Exactly. The buy and hold crowd will point out, well, look, we've always recovered. And well, that's fine if you have the lifespan of an oak tree, but there's a lot difference between losing 40% when you're in your 30s than when you're approaching your 60s. Yes.

Yeah, absolutely. So if we go to the next slide, you kind of have the Grotection gauge. So explain what Grotection is. Okay. Grotection is what we named our flagship portfolio at Revere Asset Management.

And it's a combination of it has two mandates grow assets during uptrends and protect them during downtrends. So we monitor the market across three timeframes. The short term, we use the 21 day exponential moving average. Medium term, we use the 50 day moving average. Long term, we use the 200 day moving average.

And then if the MN market is fine, which you can tell by those three, then the next question is, well, are leading stocks cooperating? So that's the first arrow up there. And you can see we update this gauge every night in the videos. And right now we've got the coveted four green arrows, as I like to say, with the only weakness being that the Dow is below the 21 day moving average.

So we are very long in our near fully invested in our client portfolios. And that's, that's not our opinion. That's the market and where it is relative to those three timeframes and how leading stocks are acting. And so just real quick, how do you kind of quantify, I mean, the, the short term, medium term, long term, I would imagine it's, you know, it's either yes or no, right. It's very binary. But,

with market leaders, how do you kind of do that? How are you quantifying whether they're-

Every week we update, we have what's called our 21-21 list, and that is a variety of leading stocks across at least 10 sectors. That's another one of Bill O'Neill's rules. You don't have to get your diversification from emerging markets or international or bonds. You can get your diversification from sectors within the S&P 500. So it's a diverse list of stocks.

We track how it's doing every night. We report it. And we also have something we created called the RGA. That stands for the Revere Growth Aid. It's eight growth ETFs. We want to make sure that they're trending higher and we want to make sure that the 2121 list

is acting well, not breaking down. And then of course, our portfolio, we own leaning stocks. So that's the best feedback that we could possibly get is our equity curve. Right. Yeah, absolutely. So just to kind of wrap this up on the market side, what does it start looking like when

you start crossing below the 21 day moving average line, the 50 day moving average line. How does that make for adjustments to your portfolio when you start seeing some of these arrows turn either neutral or into down arrows? Well, what we'll just see is our stops will start to get hit. We

When you take your initial position size, we pyramid just like, you know, not quite according to the O'Neill rules, but similar to it. And we just raise our stops as the moving averages go higher or key support trickles higher and you start breaking those. It'll take you out of the market.

And then we have different rules for index exposure, whether we are above the 21, above the 50, above the 200. So it's really just a matter of the market taking us out and then looking for a follow through day to get back in if we get to the point where we've had a serious enough correction to clear the decks and bases start to form.

And when you go into protection mode, are you just raising cash? Are you taking inverse positions or hedging at all? Or is it just...

right we're we're raising cash and yeah it's a it's a combination on the index side uh we will hedge or sometimes use inverse sector etfs if the sector is weak but on the stock side unless we have a large capital gain uh that's short term uh sometimes we will hedge that for taxable clients but for the most part it's just our our cell stop gets hit

and we exit the position always in pieces. We don't, we're not going to go from 10% long to zero. We normally peel it in thirds or fourths. Okay. Makes sense. Well, let's,

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Let's get into some of the details a little bit more on your methodology here. So kind of switching gears to drill down a little bit. One of the things that you're very focused on is kind of that volatility, its relation to beta. You're basically trying to make sure you're getting paid off for the risk that you're taking in individual stocks relative to the market. So how are you making those determinations?

It's, we're not cowboys and most of our, so we're not going to have huge positions. We, I like to say I'd rather have a nice gain in a manageable size than a larger size that I'm going to get shaken out of. I think it built one of those quotes was there's nothing worse than a sold out bull.

So we'll vary our position size from two to eight, maybe 10%, starting small with the pilot starter position and adding to it as it's working. And then just basically start to reverse it, raise the stops as the stock goes higher, or if we get stopped immediately, that's good. That's the feedback that you want from the market.

And the leveraged ETFs for hedging, sometimes that can keep you in names that you might necessarily otherwise get shaken out of. But we've also tracked something called balance at risk. So we know if all of our stops got hit, what the downside, the maximum downside would be for the portfolio. And knowing that and accepting that risk keeps us from panic selling out on a difficult down day in the market.

And then on the flip side, not 100 percent investing in growth names and having that foundation in the portfolio of using the S&P 500 so that on those days when you rotate out of growth and into value, that certainly smooths the intraday equity curve.

and we're big proponents of using that. It's difficult, you need to accept and embrace the fact that it's difficult to beat the S&P 500. And that's one of the criticisms of active large cap managers, but they have to stay fully invested. So if they'd like to sell,

They can't if the prospectus of their fund says you've got to stay fully invested. And you see constant sector rotation throughout the S&P, you know, from sector to sector, from the growth sectors to value sectors, higher beta versus lower volatility. And by market cap, if you're getting out of the FANG type names and into the lower volatility,

size names and that's when the RSP outperforms the S&P 500. So it's a matter of identifying the trend of the overall market and then adding the active management of the individual names to outperform when the wind is at your back.

Well, and maybe you could address that a little bit. Cause, um, you know, a lot of our guests, it seems like, uh, every guest that we've had recently on the podcast has been talking about a lot of these faster rotations. Um, you know, Oh, the, even what you said earlier, I mean, the Russell 2000 small caps, they looked good. And then they kind of rolled over, uh,

this sector looked good and then it rolls over. I mean, uh, you know, some of it is 10 year treasury yield related. Um, I mean the, the housing, you know, stocks were looking really good and then they kind of got into some trouble. Um,

So, you know, when you're seeing these fast rotations, sometimes at least with the sector ETFs, it can be really hard to make a bet because it seems like the trend doesn't last very long. And if you're a trend follower, what do you do when the trend doesn't last more than a week or so? Yeah, and that's another reason why we're big proponents of the S&P 500 is that sector rotation. And, you know,

Combining that with the individual stock names when the wind is at your back is kind of the secret sauce that we've come up with. Think of it this way. Split your portfolio in half.

If the S&P 500 is trending above all of those three timeframes, we use a combination of the single, double and triple ETFs to get our exposure to the S&P up to about 0.8 or one. Remember, if you're fully invested in the S&P 500, your beta is a one. So that's that's kind of the baseline.

And then we have different levels of exposure for that, depending on which of the making sure that we're above all the moving averages and the slopes of the moving averages are trending higher. We've done a lot of work on this. We hired a data scientist and there is a significant difference

in the expected average daily turn uh the best markets trend above the upward sloping 50-day moving average and the worst markets trend below a downward sloping 200-day moving average and um and also there's an impact of what is the current atr of the s p 500 that that not a lot of people talk about that but in the best markets

The average true range of the S&P 500 is going to be below 1% on a daily basis. In the 2022 bear market, it got up as high as 2.5% on a daily basis. And that's just recipe for getting chopped up. So in that type of market, we're extremely defensive, especially if we're below the 200-day moving average, because that's where all those bear markets occur. Yeah.

And just so people remember, because we have talked about this on the show before, ATR stands for the average true range. It's a measure that I think was that wilder in the 70s. And basically, you're just looking at how much does it move on a daily basis from the high to low, or in the case of gap ups and gap downs, you're going to use the previous day's close.

And then you just average that over a particular timeframe. Wilder used 14 days. If you're using market surge, we use a 30 day. There's different ways of, different timeframes, but that's the concept behind it. And maybe you could also, because you've talked about beta and volatility as well, especially in relation to the S&P 500 and maybe even some of the leveraged ETFs, index ETFs,

you know maybe describe a little bit about what it is you're looking for you know beta uh what what does that mean to you and and why do you why do you focus on it right so so we um

I initially used to allocate portfolios based on beta, but a funny thing happened in 2021 after February, and that was the 10-year broke out and all growth stocks got demolished. And they got demolished a lot worse than their beta reflected. And I started doing some research and we came up with something we call Revere Volatility Adjusted Beta, RDAB.

And what it is, is you take a look at

each individual name and compare its volatility to its average true range to the average true range of the S&P 500. The slide you're showing is a bunch of various well-known ETFs and where they are on this volatility adjusted beta scale. Like for example, the S&P, as we said, it's a one and the baseline of its average true range is a one. And then you can see it starts ticking higher than NASDAQ.

the leveraged products. And then if you go to the next slide, the reason why this is so important is because these names that we invest in, these growth names, are all over the scale. This is an example of a couple months back on the IBD50. And people want to talk about how invested they are.

you know i'm 80 long well are you 80 long in lower volatility names are you 80 long in higher volatility names

because that's going to make a tremendous difference in your equity curve intraday, as well as whether or not you've got the ability to sit through a difficult day on some of those names. Show the next slide, Dan. Well, and just to describe for people that may be listening to this, our first slide when we're looking at the beta versus volatility, again, as you said, S&P 500 right there,

one beta, one ATR versus, you know, versus itself, of course. And then if you're sticking with the S&P 500, you know, if you get a double leverage like SSO, you know, you're going to be at two and two. And a U Pro is going to be at three and three. So you're kind of getting that straight line. Now, of course, you know, you've got the Qs, which are...

a little bit more, you get a little bit more beta on those also a little bit more of the ATR. So a little bit more volatility, you know, IWM is in there too. And so you can kind of see again, as that beta goes up, you are getting an ATR, but yeah, what you said about the IBD 50 is really interesting because that slide really shows how

you know, it's not a straight line. It's, you know, you've got somewhere your beta is one and your volatility is still way up there or your beta is less than one. Like Powell, I think was on this list. And, you know, the ATR is,

much, much higher, which again, you would expect for a single stock. That's what you would expect, but the beta can be very, very different. And so then, yeah, continue on because you were going to also look at the next slide with the growth 250. Right. So what this is, is a selection of the growth 250. Again, this was taken a couple of months back, but I'm only screening for stocks that have a beta of a one or a beta of a two. Look how disparate their volatility is.

So you can't just look at beta and that's something we found out in the first quarter of 2021. You really need to know what the true average true range is of the individual names you own and then compare it to the S&P. And the backtesting that we did, we tested hundreds of thousands of portfolios. And to come up with our calculation, we're taking 76% of the beta and

and 24% of the ATR relative to the S&P 500. And we give each ticker a score, and that score dictates how big of a position size we'll take in the individual name. And then you just add all of the scores up, and that gives you the adjusted beta for your overall portfolio.

Yeah. So we can show the next slide here. And again, you've kind of laid it out exactly how you do this calculation. Yeah. Not to get too in the weeds with math, but it really. Yeah, I was told there would be no math. You just need to know what the ATR is of the S&P 500 and the ATR is of your individual name.

And then you take 76% of the beta, 24% of the ATR, smooth the calculation. I gave an example of NVIDIA in there.

And you can see what that calculates out to. And then this is actually our current portfolio in-house Grotexion. It's got a 1.79 adjusted beta. Again, the S&P 500, if we were 100% invested in the S&P 500, it would be 1.0. If we were 100% in SSO, it would be 2.0.

So we're at a 1.79 there and we adjust the size. The target size is like a 0.15 to a 0.2. That's where we're comfortable and that's where we tend not to get shaken out.

- And that is for that target of 0.15 to 0.2, that's more for a single stock? - That's for a single name. So that's a combination of the position size that you take and the volatility score for it. You multiply those and we don't wanna go above a 0.2 on one of those or otherwise we're taking on a little bit too much risk with an individual name.

So if you start seeing that out of whack, what are some of the things you can do? Of course, I'm sure you could reduce your position size or you start looking elsewhere. Yeah, the trick is really to not let it get out of whack and just obey the rules that we've come up with. Take your position size, set your stop, and let the market tell you if you made a good decision or a bad decision. The other benefit of using...

of using this approach with the 50% leveraged ETFs or the S&P 500 is that it allows us to focus on the names that we really think are going to strongly outperform. Because why would we buy a stock that's going to do, say, two times, that our expectation is to do the two times the S&P. And our expectation is based on the historical slope of the relative strength line.

Why would we take a stock that's only going to do two times or we think is only going to do two times when we can buy SSO and not have any single stock risk? Right. In other words, why, you know,

You're much better off with the broad S&P 500 owning it. All of the rotation is handled by it and you don't get any earnings blow ups or you don't get any analyst downgrades on it. And it really allows you to focus on just the best of the best names. So you don't have to say, well, I can own a Costco. It's a chugger. Well, why is it going to do three times the S&P? Probably not. Why have it in the portfolio?

oracle's another one it did you know there's nothing wrong with it the chart looks great uh but it's not going to do three times the s p 500 we um we take some starter positions in those to sometimes see if we can really catch uh catch a tiger by the tail and let them go higher you do see that sometimes but normally what we end up seeing is that um we track we write down what is the s p trading at each time we do a buy and we're constantly comparing uh

that return versus what the S&P is doing so that we're not wasting our time in underperforming names. And then one other thing, and just kind of looking at, as you said, you applied this to your own portfolio, being very transparent here with, you know, do you eat your own cooking? The only thing I see that's kind of a little interesting is that, you know, as you mentioned, the ETFs, you kind of allow yourself to go with a little bit of a higher portfolio

you know, score there because as you said, you're not taking that single stock risk. So exactly. Yeah. Now one other thing I wanted to just kind of bring up, you have SPLG there, you know, so maybe you can share why SPLG is your preferred. Sure. So it's actually cheaper on a, you

expense ratio basis than SPY and SPY holds your dividend for five weeks after they declare it, which is just absolutely ridiculous. Uh, SPLG pays out your dividend within a couple of days. IVV and VOO are the, uh, the other two major, uh, uh,

for the S&P 500, they pay it out within a week, but SPY takes five weeks and no reason to ever own that. And SPLG is also a lower price so we can get, for some smaller portfolios that we have in-house, we can get it closer to what the actual percentage allocation is that we want. - Yeah, and when you shared that on IBD Live,

I'll be honest, I was kind of blown away. That just took me by surprise, that five-week dividend holding. That could be sizable. Yeah. And they're okay with it because they're holding on to that money during that time. Oh, yeah, sure. But yeah, very good information there. And again, it looks like you have... Is this sorted? Yeah.

in any particular order or uh it's by position size except for mstr normally the way i present it is we've got the uh the index etfs first then okay uh sector etfs and then that in this case it's an asset class which is bitcoin and mstr is uh right there because it basically moves like a leveraged bitcoin play yeah and then the individual growth names by position size

And so, yeah, you do have the only ones that look smaller on your score below that 0.15 are because you have smaller position size. Right. Yeah. Let's go ahead and kind of, you know, to just kind of sum up this whole thing. Again, this is a lot of different things that you're looking at, but...

at the end of the day, it really kind of takes the emotion out. I mean, sometimes I find it so much easier to look at a spreadsheet and have the spreadsheet kind of tell me what to do instead of like trying to wring my hands. So maybe you could talk about where that's useful and take the emotion out. Exactly. And this is just another benefit of using the ETFs is

So many headlines that, you know, fear sells always. The headlines, the negative headlines are always going to be trumpeted louder than the bad ones. And early in my career, I found the biggest problem I had was being underinvested. You know, having having a can, an O'Neill methodology with a sell strategy is great. But if you overuse it and you're not in the market when you need to be.

You don't have enough exposure. You're not going to outperform or you're going to constantly be chasing. If you have a very small amount in the market and then the market gaps up 2% one day and then another percent the next day, then you're chasing and you can get stopped out.

So limiting the position size and sticking with the S&P 500 as the foundation. And not that we're always in that. We will absolutely cut back on that and it'll go to zero if we break below the 200 day moving average, either through hedging or just by selling.

But we want to default in giving the market the benefit of the doubt if it's above the 200-day moving average. But we want to be very specific when we're heavy in growth names because they're not always in vogue. They've had a great October. They had a great November, December last year.

They lagged a little bit at the middle of this year relative to the indexes. So we found that to make that smooth equity curve, that's the best combination for our clients. And the other thing is managing $200 million. There are a lot of...

growth, smaller growth names that we can't buy. We have a minimum of $100 million in daily dollar volume. We won't buy anything below that. The liquidity factors into the position size that we'll allow also. But we can make that up by focusing on those leveraged indexes for the S&P 500 and getting the exposure that way. And then using the active management with the

individual IBD type names when the wind is firmly at our back. - So, you know, you kind of addressed this, but I just want to kind of put a bow on it 'cause Nancy did have a question. I'm not sure if this is the Nancy that we just saw in Vegas or not, but,

Nancy's question is, OK, so how do you maybe use some of this for, as you said, the headline risk, the election uncertainty, the earnings uncertainty, you know, all of these different things? Do you ever, you know, make allowances for that, that, oh, there's there's a binary event coming up and I need to maybe adjust one way or the other? Or do you just say, look, over time, it's going to kind of work itself out?

Well, the thing with binary events is there's the the number or the outcome, and then there's the reaction to the outcome. Back at the lows of 2022, there was a terrible CPI report that came out. The market extended to the downside. It had a massive gap down. And then that same day it had a huge positive reversal and that put in the volume.

So if you knew the number ahead of time, you would have stayed short, but that wasn't what the reaction was. Then you've heard the sell the news factor all the time. Keeping the individual levels of exposure to the S&P 500 is and letting the market take us in or out is a big part of it.

It's the same way as it is the stops on our individual names. Now, I'm as nervous as the next person about the election and what happens afterwards. But you really don't know. And we're prepared with that balance at risk calculation that we have. We know like right now our downside is about 6% if all of our stops got hit. So we're just going to be okay with that.

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Let's create. Yeah, very good. Well, let's go ahead and transition to some of the stocks that you're paying particular attention to now. And again, it looked like these were all in the portfolio. So again, you're eating what you're cooking. Maybe we could start with the big one that's on everyone's mind, NVIDIA. I do have a position in this myself. It has earnings coming up with AI,

you know, really kind of capturing folks' imagination in terms of what is possible. NVIDIA is just kind of at the forefront. You know, all roads lead to NVIDIA for AI, it seems. So give us your assessment of this one.

Well, there's absolutely nothing wrong with that chart. We got up to the top of the flat base and we're consolidating a little bit there just the same way that the market's been consolidating for 16 days. When we get into earnings, we have a calculation that we do. We take a look at what the market maker move is. In other words, the expectation, either positive or negative on the earnings report. And we take a worst case scenario on that and multiply it by two.

And we don't want to lose more than 1% of our overall portfolio on an earnings blow up. So we'll make sure that our size going into earnings will not allow on a minus two to the downside of the expected move to lose more than 1% of the portfolio. And we'll adjust that position size accordingly. I don't agree with you have to have this position to go all in or all out.

I think if it's working and it's a leader, you give it the benefit of the doubt and just size your risk accordingly based on what the expected move is to the earnings reaction. Yeah. And when you say the market maker move, I know a lot of people like to just use the at the money put and at the money call strategy.

And that's what that is. Yeah. Yeah. So sometimes people use a factor, you know, they multiply it by point eight or whatever. Do you just use the straight number for yourself and then you multiply that by two and say, OK, this is a really bad. Right. You know, a situation that could occur. And then again, as you said.

If you take that and you say, okay, what would that do to the portfolio? Then you can manage your risk that way. Okay. Yeah, that totally makes sense. What about the fundamental side? We haven't really talked about the fundamentals here. And I know, again, you follow kind of the IBD methodology and we spend a lot of time talking about the technical action and some of these numbers, but sometimes it's about the fundamentals too. Where does that kind of fall into your analysis?

Well, if you're looking for names that you want to do a minimum of two to three times the S&P 500, they're going to be growth names. So we do pay a lot of attention, not always just to the EPS, but we insist on having big sales growth because without sales growth, you're not going to have big earnings growth. But it's absolutely factored in here. You

You know, you discuss the leading names every day on IDD. We keep a 21 over 21 list. Those are all fundamentally sound stocks. And it's a combination of the M in market and the N, meaning what's new in these names, what's going to make them outperform. I think another Bill quote was, it's not the chart that makes a stock double. It's the story behind the chart. And you can take a look at two charts, and if you don't know the fundamentals of

about it, the one that's going to double is the one with the big earnings and sales growth, not the one that has single digit of each. So the fact that we're looking for that two to three times out performer of the index leads us naturally to these big growth names. Well, speaking of the story, if we went ahead and took a look at Tesla, you know, this is one that

Again, a lot of people were kind of looking at this earnings report. They're paying attention to a lot of the sales numbers. Tesla was kind of down in the dumps for most of 2023. Wasn't looking as strong. Then we had this most recent base and a pop on earnings.

where was kind of the entry for you on Tesla here? - We bought it on the gap up day. - Okay. So maybe describe a little bit about with a day up that much

How do you do that? What do you factor in to make that decision? It was not 22% by the end of the day. Right. The low of the gap up day, what you see very frequently and we'll talk about Reddit in a minute. It's the same situation. Historically, you're looking for you want to know what a stock has done in the past.

And then if it's something that has a trading history like Tesla, but we know from experience that when Tesla moves, it can move very quickly in a short period of time. Just look at that July move on the announcement of the robo taxi day went from 200 to 270 in two weeks.

So a big stock like that, and really Elon, he can exaggerate at times and his timeline doesn't always match up with reality, but the stock moved on massive volume and it made a day two higher high, which is important.

What you see frequently when these things gap up is they will never break the low of that gap up day. So that gives you a level to trade against with maybe 1% to 2% just for wiggles to the downside. But it's doing what you want it to do. It made a day two higher high. Now it's consolidating over the last three days. And historically, you see these episodic pivots or power earnings growth pivots. Reddit had one today. And

We know what names can do when these occur. There's Reddit. We bought this after hours yesterday at 96 and then added at 105 after the open today. And it should not break below of that gap update. Let's take a look at one of the historical precedents for this. Go to 2013 and bring up meta. And

There you go, July, 2013. - Yeah, so this was, and this was again, such a classic where everyone was so excited about the IPO and it didn't do anything for a year, but- - Right, but what happened with that? What happened with that? There's the big gap up. I think it was up 40% that day if you hover over it. What happened was they announced, okay, 29%, they announced that they were having problems

monetizing mobile and they they with this earnings report they did it and the stock never looked back after that you had one day up it never broke the low of the gap up day uh and it went on uh one of the model runs uh another example of this is nvidia back in uh 2023 with the um announcement of their their ai chips that gap up uh started a big run

It didn't go vertical the way it did immediately for Facebook, but we've got like 400% returns for some clients in this that had taxable accounts since that initial release.

And again, didn't break the low of that gap up day. He had the end in canceling something new, AI chips and Reddit today using the low of that gap up. I mean, if you listen to that, what's happening is that Wall Street's caught off sides. They had certain expectations. They were expecting Reddit to lose money on this earnings report. They made 16 cents.

And the conference call was just nothing but good news. Three IBD flag funds are already in it. Only 220 or so mutual funds own it. So there's a lot of room for growth. It doesn't have a huge float. It broke out of an IPO base. Arm did a similar earlier this year, broke out of an IPO base on its earnings report.

It wasn't as nice afterwards. It gave up a lot of it, but you can see those first three days in arm were just unbelievable. Again, didn't break the low of the gap up day. There are other sell signals. If you forward to where it did break the low of the gap up day, that was different. And breaking the 50-day moving average, we would have been out of that.

anyway. So you can use the low of the gap update to size at the initial buy, and then the stock needs to stay in, act on its own merits to stay in the portfolio. Yeah. And then, you know, again, some of these, they go absolutely crazy, as you mentioned, you know, more recently, you know, with Tesla and that announcement on the robo taxis, you know, it went really kind of strong. And then,

At what point do you kind of say, oh, I need to sell this. I've gotten the heart out of the watermelon and it's better to just kind of take the gift while I have it. Yeah. In this case, is that green line on there, the 21-day moving average? Yes. Yeah. That gap below it on earnings?

and that would have gotten us out. We use the 20 initial sizing. Sometimes we use the eight for the initial sizing. And then if the 21 gets above that, we'll switch to the 21 for the stop. And then if the 50 gets above,

of our entry, we use the 50 days to stop. It's really the performance of the stock that keeps you in it for the longer term. - And as your cushion increases, as the stock continues to trend, then you just kind of shift and it's almost like you're shifting your timeframe, right?

Right. Yeah, perfect. If it gets extended, we can do some offensive selling. If it pulls back and bounces at a key moving average like the 21 or the 50, you can add some back if you're undersized on it.

So it's a different rules for trading around a core is, is what we use. What do you, what do you kind of identify as your indicator that, oh, this might be getting ahead of itself? You know, what's, what's your extended? Yeah. On, on thinkorswim Keltner channels give, I don't have a slide of this, but we set them up with a plus one.

to a plus four against the 21 day moving average and getting plus three or plus four above that 21 is extremely extended. And it's at least a reference point for taking some off

on doing some offensive selling. - Yeah, and again, Keltner Channels, it's math, you know, it's all based on math. So again, I think your IT background is showing maybe a little. - It might be. - So, okay. One more stock to cover. How about VRT? Vertiv, of course, if you look at Vertiv on the weekly chart,

This just had a phenomenal 2023. So of course, a lot of people are like, okay, this, this deep base 43%, uh, is it, is it done? Uh, but here we are at new highs, uh, tightening up. Um, and, and I, I do have a position in this myself. Yeah, we, we've been stopped out of this multiple times. Uh, but got back in initially on, uh, September 30th.

And that was when it was forming that handle after the big move up and took a starter position in that and then added to it on October 10th.

and then again on october 23rd and the third buy is not profitable yet but we're up like 14 on the first buy and about five percent on the second buy uh one of our larger uh positions you can see the shake with earnings that's very typical of the reaction for that so we didn't want to we actually took some off going into that

in expectation of that big bar that you saw on earnings day. Right. Not a surprise there, but it's right in itself. It bounced. It held below of that day, worked its way higher, pulled back today, but it's still obeying the 21-day moving average. Mm-hmm.

Very good. Well, before we kind of let you go here, Don, I wanted you to be able to show one more slide that you had to kind of show how you're keeping track of stuff. Could you walk us through this? You've got a stop versus cost. You've got drawdown information, that bar that you referenced earlier. Right.

Balance at risk, we call this. This is what takes the emotion out of it. And, you know, relative to the election, relative to economic data that comes out relative to war in the Middle East, this is the risk that we've accepted with each of our individual position names.

And every day after 10 o'clock, I take a look at the name. Where is the eighth day? Where's the 21 day? Where's the 50 day? And where is it relative to our cost?

And the best stocks will trend in a strong market like this. The best stocks will trend and almost hug the eight day exponential moving average or the 10 simple. Those are very similar. And we give a little bit of leeway, 1% to 2% below that, but just up the stop a little bit every day on these.

And if it gets taken out, that's the market telling us that it got taken out. Sometimes it'll get violated intraday, but in a strong bull market, you want to try to give it to the end of the day or preferably the end of the week. So, you know, plus or minus a percent or two for the balance at risk that we calculate for each position.

This is how we determine the risk to the downside. And it's a measurement and again, another way to take emotion out of it. And so again, you, you know, by tallying all of this data up, it looks like when you did this, your, your balance at risk percentage was 6%, which was again, assuming that everything hit your stops.

and that you were able to get out at those stops, you'd be looking at a 6% hit on your portfolio. And you're wanting to keep that below 10, right? Yeah, and that's under normal circumstances. Obviously, if a dirty bomb goes off in Manhattan tomorrow morning, all bets are off. But under somewhat normal market conditions...

This is our way of controlling risk to the downside and measuring it. - Very good. - You can't manage what you can't measure.

And I mean, it's not just in markets that that phrase gets used. I mean, I feel like it's in sports. It's in pretty much so many different facets of life. So I think a very good rule of thumb there. And it looks like you're measuring a lot. So that's really a good way to go to keep those emotions out. We do measure a lot, but we're passionate about it. We are...

It's very gratifying knowing that after a near 40% run up in our portfolio over the past year that we can tell our clients that worst case, if we pull back, you're going to keep 34% of that. If we go 6% to the downside, as opposed to buying and hoping, if you go into a bear market, giving that back. Nobody wants that. And it's a sleep at night situation.

factor that comes along with being a Revere client and we hear all the time when people are comparing us to other wealth managers that you guys are the only ones that talk about the downside. Everybody else just says, you know, and you get a normal 8% return with this portfolio.

And yeah, I wish everybody got 8% every year for everything. - Well, and kind of, you know, when we were talking on the pre-show, you know, back to your analogy at the beginning where, look, if you're going to Arizona and Maine, you know, to Maine, there can be a lot of detours along the way. You might end up at Maine, but you know, if for some people, if you took a detour to Texas,

And you didn't get back on the road. You're never making it to Maine. You know, it's, um, those detours can really knock people off course. Uh, either they, they, they get so hurt that they don't get back into the market. Uh, they just kind of give up. And we saw that after the great financial crisis, we saw that after the.com bubble, um, you know, a lot of people that just said, okay, this, this isn't for me. I'm, you know, I'm going to go back to put my,

you know, money under the mattress or, you know, getting 0.2% or whatever on it. And yeah, it's just a shame. There was no financial planning software out there that had two 50% drawdowns in the S&P 500 in eight years built into the forecast. So obviously your timeline in life

has a lot to do with how much risk you can manage, but it just makes too much sense to stay near the top of the equity curve when you have reasonable rules to get you out. And then just as robust rules to get you back in and not argue with the markets

because the end of the world is coming after the 2007 to 2009 financial crisis kept so many people from getting back in. But it was just a matter of monitoring the relative strength of the names that were going to be the next leaders when the market finally decided that enough was enough and riding those. And it goes, you know, it happened through COVID. It happened after the 2022 bear market. And it's just applying the same rules over and over again. Yeah.

Well, a lot for people to kind of digest here. And for those of you that maybe watch this on the audio, Don did provide some really great slides. So if you want to go check out the video at investors.com/podcast, or you can just do it right on the YouTube channel. That's another way to kind of access those slides and look at those videos because you had a lot of great information. And again, there was some math here. So a way to kind of set up your own spreadsheets to maybe follow

some of the stuff that Don was talking about. And, you know, and again, in a very methodical way. So, hey, great debut, Don. I think we're, I think we'll have you back. So thanks a lot for showing up and sharing with your, sharing all your knowledge with our listeners. Thanks for having me. It's been a pleasure. I mean, you guys, I started from level one, you know, in 2003.

and stuck with it. Bill signed his, I had Bill signed his book and he said, never quit. And that's what it takes. You stick with something that works and never quit. And the system works as long as you stick to it and tailor it to your needs along the way. Awesome. Great having you, Don. We'll see you next time. Thanks so much.

Okay, that's going to wrap it up for us this week. Thank you so much for joining us. And again, as a reminder, you can always like and subscribe on YouTube or go to investors.com slash podcast. Use the podcasting platform of your choice, but do make sure you kind of

Uh, like it. If you do appreciate the content that you're getting here. Uh, also we're going to have Katie Stockton back on the show next week. She of course is the founder and managing partner of Fairlead. Uh, I should also say Katie Stockton CMT cause she's got those three, uh,

letters behind her name, a charter market technician. So she's going to walk us through a little bit of what's happening right after we are going to be deciding the election. We might not have the results at that point, but she'll kind of give us a little bit of her take on that, on the technical action. So please join us for that and we'll see you next time. Bye-bye. ADP imagines a world of work where smart machines become too smart. Copier, I need 15 copies of this. Printing.

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