This page contains four sections, describing the DGR Macro Trading Model,  the WMA Total Market Fundamental Allocation Model, the Daily Equity Trading Model, and a Summary of Fundamental Ranking Metrics.

I.  DGR Macro Trading Model

The DGR Macro Trading Model evaluates around 300 global asset classes, including the major world stock markets, equity sectors, bond sectors, several commodities, and currency crosses. The model uses an in-house quantitative algorithm to evaluate the market price data for each asset class.

The DGR Macro Trading Model contains lots of information, which this article will help readers decipher.

Starting at the top, the model gives our target asset allocations between the four major asset classes used in the DGR Strategy Portfolios. The allocations are determined by interest rates, our Market Risk Indicators, and relative price strength between the fours asset classes.

1. U.S. Equities
2. Developed Market Equities
3. Emerging Market Equtieis
4. Bonds

The next lines show the WMA Sector Recommendations for U.S. sectors and Global sectors (over-weight, under-weight, or equal-weight vs. the S&P 500 or the MSCI ACWI Ex-U.S.)

• Consumer Discretionary
• Staples
• Finance
• Real Estate
• Industrials
• Utilities
• Technology
• Telecom
• Energy
• Materials

Next, the left hand column lists our investable indexes by region, then by asset class (North America, South America, Europe, Asia, Pan-Regional Indexes, Sector Indexes, Commodities, Bonds, and Currencies).

The first feature of the DGR Macro Trading Model is the “Reversal Alerts / Oversold Bounce” column. Reversal BUY ALERTS will appear if our algorithm criteria are met. The Oversold Bounce BUY ALERT appears if the asset’s price reaches oversold levels then begins bouncing higher. These alerts will appear each morning on the model update if the alert is triggered.

The model provide a short-term signal with a 1-3 week horizon and an intermediate-term signal with a 1-3 month horizon. The absolute price trend portion (bottom two lines for each asset) gives “BUY”, “SELL”, and “HOLD” signals. The yellow “HOLD” signals indicate that overall price performance of the stock is in line with our Global Composite Index (stocks and bonds). We do not trade on “HOLD” signals. We recommend referring to the prior signal when a “HOLD” appears. For example, if yesterday a stock was on “BUY” and today we see a “HOLD”, then the “BUY” is not yet cancelled. Only when a “SELL” appears will a long position be closed based on price deterioration. The same logic applies in the other direction.

Absolute scores are summarized into five categories:

Buy (green boxes)
Accumulate (yellowish-green boxes)
Equal-Weight (yellow boxes)
Reduce (light red boxes)
Sell (dark red)

The relative price indicator (top two lines for each asset), contrary to the absolute price trend, relies exclusively on the “WMA price”, a price vector created from the ratio of the asset price relative to our above benchmark. For investors looking to remain invested in out-performing asset classes, the relative model is a useful tool. The model provides the last 10-days readings giving either a “Over” (Over-Weight, strong out-performer) “Accum” (Accumulate, moderate out-performer), “Equal” (Equal-Weight, the asset is trading in-line with our benchmark), “Reduce” (moderate under-performer), or “Under” (Under-weight, strong under-performer). We watch the relative price indicator closely, as an out-performing stock typically sees deterioration in its relative performance versus the index before the absolute market price turns down.

Relative scores are summarized into five categories:

Dark green = strong outperforming security
Light Green = outperforming security
Yellow = performing in-line with the market
Light red = underperforming security
Dark red = strong underperforming security

The Weekly column give a big picture view of the asset’s combined relative strength and absolute price direction using 40-weeks of data. In general, it is advisable to trade in line with the weekly trend (ie: buy daily price weakness as long as the Weekly is showing “Rising”.

The RSI column is populated only when the asset’s 9-day and 14-day RSI attain over-bought or over-sold conditions. The model flashes an OS (oversold) or an OB (overbought) if our RSI indicator falls/rises below/above 30 or 70, respectively. We also calculate a “relative RSI” which tells whether the asset is over-sold “Rel OS” or over-bought “Rel OB” on a relative basis.

The Break-Outs column flashes an ” ↑ ” if the price breaks to a new 5-day high (on intraday basis, including recent session highs and lows) and a ” ↑↑ ” if the price breaks to a new 10-day highs. The ” ↓ ” signals a new 5-day intraday low and the ” ↓↓ ” a new 10-day break-down low.

The Close Location Value (CLV) tells readers where if asset price is closing near the high end, bottom end, or middle of its trading range over a certain look-back period. The CLVs are a quite eloquent way to measure the strength of a stock. The model looks at the most recent closing price within a 1-day, 5-day, 21-day, and 63-day range that includes the “wicks” (intraday lows and highs). A simple example: if the a stocks’s high price over the last 21-days was $300 and the low was $250, a daily close at $300 would give a 21-day CLV of +100%. A close at $250 would give a 21-day CLV of -100%. A close of $275 (exact mid-point) would give a 21-day CLV of 0%. Positive CLVs (boxes shaded in light to dark green) are favourable for investors with long positions in the stock.

Finally, the last column shows our WMA Risk Score for each index (see explanation of our Risk Score below).

II.  Daily Equity Trading Model

Our Daily Equity Trading Model take over from the WMA Total Market Fundamental Allocation Model by drilling down to daily closing price data. We have several objectives with the Daily Equity Trading Model:

1. Monitor a list of attractive fundamental companies whose current stock price does not meet our weekly price trend requirements for investment at this time.
2. Visualize significant price movements on the chart via the Alert feature, the RSI indicator and the Break-Outs feature.
3. Manage risk for existing positions via the automatic Sell Alerts as either absolute or relative price trend deteriorates.

To help in deciphering the model information, we provide a summary here of the model features.

The first four columns relate the company name, ticker, country, and sector.  The next column shows if any WMA strategy portfolio is holding a position in the company. The next column provide pop-up BUY ALERTS. Alerts may come from price reversals or oversold bounces. SELL ALERTS are also programed to monitor price action of our portfolio holdings. The algo looks if the stock price has been in an up-trend (down-trend) based on the short-term WMA absolute trend score. The algo then asks if today’s high price (low price) was still lower (still higher) than the high (low) of the prior day or day below last. Finally the also measure the Close Location Value (CLV) and will generate an sell alert (buy alert) if the price closes near the session low (session high) after failing to make a recent new intraday high (low).

For each stock, we provide 4 signals with 10-days of history. The top two lines show the evolution of the relative price curve for the stock (vs. the Total Market Index). We use the terms “Over” (over-weight), “Accum” (accumulate), “Equal” (equal-weight), “Reduce”, and “Under” (under-weight) for the relative indicator. The top line uses short-term (1-3 week) technical indicators and the second line intermediate (1-3 month) technical indicators. The objective is to visualize the recent evolution of relative price performance in order to anticipate future changes in the stock’s absolute market price. The third and fourth lines for each company give our signals for the daily closing market price. Again, the third line use shorter term technical indicators and the fourth line uses intermediate-term technical indicators. The objective to visualize the price inflection zones (moving form SELL to HOLD to BUY, etc). It is also helpful, when buying a stock, to see how long the price has been on BUY, to give an idea (in terms of time) how late a purchase today would be in the current up-wave.

The next column flashes an OS (oversold) or an OB (overbought) if our RSI indicator falls/rises below/above 30 or 70, respectively. In addition, the model flashes Rel OB or Rel OS is the relative price curve enters an extreme zone. The Break-Outs column flashes an ” ↑ ” if the price breaks to a new 5-day high (on intraday basis, including recent session highs and lows) and a ” ↑↑ ” if the price breaks to a new 10-day highs. The ” ↓ ” signals a new 5-day intraday low and the ” ↓↓ ” a new 10-day break-down low. The Close Location Value (CLV) tells readers where the asset price’s most recent closing price finished within a 1-day (top line), 5-day (2nd line), 21-day (3rd line), and 63-day (4th line) range that includes the “wicks” (intraday lows and highs). For example, if the a stocks’s high price over the last 21-days was $300 and the low was $250, a daily close at $300 would give a 21-day CLV of +100%. A close at $250 would give a 21-day CLV of -100%. A close of $275 (exact mid-point) would give a 21-day CLV of 0%. Positive CLVs (boxes shaded in light to dark green) are favourable for investors with long positions in the stock.

The last column shows our WMA Risk Score for each stock (see below for explanation of our Risk Score).

III.  WMA Total Market Fundamental Allocation Model

The WMA Total Market Fundamental Allocation Model combines the quantitative algorithms found in our Trading Models with our fundamental company rankings. The qualitative allocation model places greater emphasis on forward-looking (consensus estimates) fundamental data in the individual company fundamental rankings. The quantitative model inputs include a relative price vector (the “WMA price”) for each stock, an absolute price vector (the stock’s dividend-adjusted market price), and our in-house Risk Score for each company. The fundamental rating criteria are presented below. Our Total Market Allocation model universe contain over 5,000 investable companies trading on the U.S. exchanges, including foreign firms via their ADRs (excluding illiquid stocks with wide bid/asks).

The allocation model relies on important forward-looking fundamental data. We consider fundamental data separately from the quantitative model (the “BUY”, “SELL”, and “HOLD” signals are not incorporated our fundamental scores). Our composite fundamental rankings are based on a weighted average of the following metrics:

• Growth,
• Valuation (Enterprise Value to EBITDA)
• EPS Revisions (composite of 3-month & 1-month (current and next year estimates), and number of analysts revising up/down),
• Sales Revisions (composite of  3-month & 1-month for current and next year estimated revenue),
• PEG ratio (consensus forward P/E divided by our % Growth calculation)
• Financial Situation (various debt and cashflow measures),
• Profitability,
• Dividend Yield,
• Price to Forward Earnings estimates (PER) for current year and next year,
• Price to Book Value for company against itself, using its 5-year average P/BV,
• Market Capitalization-to-EBIT,
• Consensus analyst ratings composite (consensus recommendation, 4-week change in recommendation and 4-week change in analyst 12-month price targets).
• Insider Trading Activity

In accordance with a techno-fundamental approach, we have stronger conviction in “BUY” signals when the company fundamental score is high, and, conversely, are more inclined to sell/avoid a stock flashing a “SELL” signal accompanied by a weak fundamental score. A summary of our fundamental criteria is presented at the end of this page.

In the columns following the company name and ticker, we show show three columns, ΔG, ΔV, ΔY.  These denote the weekly change in the company’s Growth Composite score, Valuation Composite score and Yield Composite score.  Each week we update the fundamental scores for all companies with the latest data. We note on the Model significant changes in fundamental scores. Significant is defined by a score change greater than +/- 1 standard deviation of all score changes. An up arrow denotes a positive change in company fundamental from 1 week ago. A down arrow denotes a negative change in company fundamental from 1 week ago. 

The next two columns show our in-house calculated Risk Score for each company and our ESG Score grade for the company. Our Risk score ranges from 1 (lowest risk) to 5 (highest risk) while the ESG grade ranges from A (very ESG-focused company) to D- (company failing to meet minimum ESG criteria).

Next, we post the cluster (Growth, Value, Yield) to which the company currently matches. Data for our fundamental scores are derived from Thomson Reuters consensus forecast data for each company covered in the model. We separate companies into these fundamental “clusters”, according to traditional fundamental measures:  Valuation (company valuation and stock PER), Growth (rate of increase in sales, earnings growth and positive/negative sales, earnings revisions), and Yield (high dividend, strong profitability and solid financial situation). All our fundamental criteria are described below. The model will “flag” the top fundamental stocks in each cluster on a weekly basis, regardless of the price trend signals shown in the model. By disregarding the price trend indicator at this stage, we gather a list of potential investment candidates to enter into our Watch List Trading Models (see explanation in last section below). With our Watch List Trading Models, which uses daily closing price data, we can fine-tune our entry and exit in potentially volatile markets.

Investors can create/maintain a thematic portfolio (eg: a high yield portfolio) based on the model’s weekly recommendations or form a multi-strat portfolio, selecting companies from all fundamental clusters. For simplicity, we only show the companies at the top of each cluster — the candidates for inclusion in our Top Picks and Global High Yield portfolios. We do not sort on market capitalization, as this is very secondary to the fundamental strength of the company. Fundamental scores (not shown on the Allocation Model prints) range from zero (poor fundamental condition of the company) to 100 (excellent fundamental condition of the company).

To give perspective on intermediate-term price performance, the model show the evolution of our quantitative price signals for the past several weeks. We use a medium/long-term horizon for the allocation models (“long” from a technical analyst point-of-view), limiting our data observations to 40-weeks of Friday closing price data (daily price data, however, are used in our Trading Models). The models give “BUY”, “SELL”, and “HOLD” signals. When a stock’s signals shows all three colors over the past 6 trading weeks (“BUY”, “SELL”, and “HOLD”) this is an indication that the stock price is consolidating in a horizontal trading range or is in the process of a potential reversal. This is where the Watch List Trading Models serve a role, as candidate stock price moves between Friday closes can easily be detected without inspecting hundreds on charts.

IV.  Summary of Fundamental Ranking Metrics

 Growth (Revenue, EPS, EBITDA). The growth rating is based on the evolution of the turnover (sales), Earnings Per Share (EPS), and EBITDA of the company between the last year and the three coming years according to consensus estimates. The higher the growth is (from a relative viewpoint), the better the rating. The goal is to rank companies according to estimated sales & EPS and to identify companies with the highest growth.

Valuation. The valuation rating is based on the ratio between enterprise value and its turnover for the current fiscal year. The lower the valuation is, the better the rating is. The goal is to rank companies according to valuation and to identify companies with the lowest valuation.

3-Month EPS revisions. The  3-month EPS revisions ratings are based on the evolution of EPS (earnings per share) revisions of the company over the current and subsequent fiscal years. Over the previous 3-months, the more the EPS estimates are revised upward (from a relative point of view), the higher the rating. To reinforce the revised dollar earnings forecasts, our 3-month EPS score also calculates a ratio of Number of Analysts Revising Higher-to-Number of Analysts Revising Lower over the past 90-days. The goal is to rank companies according to analyst estimates and to identify companies with the best EPS estimates.

1-Month EPS revisions. The  1-month EPS revisions ratings are based on the evolution of EPS (earnings per share) revisions of the company over the current and subsequent fiscal years. Over the previous 1-months, the more the EPS estimates are revised upward (from a relative point of view), the higher the rating. To reinforce the revised dollar earnings forecasts, our 1-month EPS score also calculates a ratio of Number of Analysts Revising Higher-to-Number of Analysts Revising Lower over the past 30-days. The goal is to rank companies according to analyst estimates and to identify companies with the best EPS estimates.

Revenue revisions. The 3-month revenue revisions ratings are based on the evolution of revenue revisions of the company for the current and subsequent fiscal years. The more revenue estimates are revised upward (from a relative point of view), the higher the rating. The goal is to rank companies according to analyst estimates and to identify companies with the best revenue estimates.

Financial Situation. The finances rating is partly based on the evolution of the net & total debt of the company compared to total equity and compared to EBIT. The other part of the finances score looks at estimated free cash flow, normalized by the company’s current enterprise value. The higher the cash level, the better the rating. The goal is to rank companies according to their financial situation and to identify companies with the highest quality balance sheets.

Profitability. The profitability rating is based on net margin of the company for the current and subsequent fiscal years according to consensus estimates. The higher the ratio, the better the rating. The goal is to rank companies according to the “net income/revenue” ratio in order to identify those which have a high payoff.

Price Earnings Ratio (PER). The price earnings ratio rating compares the company’s current share price to its per-share earnings for the current and subsequent fiscal years. The lower the PER, the better the rating. The goal is to rank companies according to their earnings multiples and identify those which are cheap.

Price-to-Earnings/Growth (PEG). This ratio takes our forward P/E estimate and divides it by our in-house calculation of aggregate company sales and earnings growth. One way not to overpay for a growth stock is to ensure that the price you pay for each dollar of growth remains in a reasonable range.

Consensus. The consensus rating is based on analyst recommendations. It provides an indication of the position taken by most analysts, compiled by Bloomberg. Our consensus score is centered around 50 (on 0 to 100 scale, like all our fundamental scores.  One-third of our score is the consensus analyst recommendation itself (the 50 bar falls between Hold and Accumulate). One-third of our score is based on changes in analyst recommendations which have recently occurred, up to 4-weeks ago (50 corresponds to no change in recommendation).  Finally, one-third of our score is based on changes in analyst 1-year price targets which have recently occurred, up to 4-weeks ago (50 corresponds to no change in price target).  The goal is to identify companies that benefit from a maximum of buy recommendations as well as recent positive changes in analysts’ outlooks.

Yield. The “yield” rating is based on the dividend relative to its share price. The higher the dividend yield is, the better the rating is. The goal is to identify companies that can supply a significant dividend return to their shareholders.

Price/Book Value. For this valuation metric, we look at the company against itself.  Bloomberg gives us the 5-year average P/BV level.  From this, we calculated where today’s P/BV level falls within the historical range.  A company whose current price is located in the lower end of the historical range is considered more attractively valued.

Market Capitalization-to-EBIT. A fourth look at valuation, considering how the market is valuing the company relative to Earnings Before Interest and Taxes (higher up on the Income Statement and less manipulated than bottom line earnings).

Insider Composite. This score ranks companies by the degree on company insider trading. One-half of the composite score ranks company by the Number of Insiders Buying less the Number of Insiders Selling. The second half of this score compares the dollar amount of insider buying to the dollar account of insiders selling, as a ratio of the company’s market cap.  The look-back period for our insider activity is 3-months.

Risk Score. Our Risk Score is the composite of four individual rankings:

• Stock Beta
• Stock Standard Deviation
• Stock Price Percent Above/Below 40-Week Moving Average
• Stock Price 52-Week Close Location Value (CLV)

Each component is weighted dynamically depending on stock price volatility and price action.  Beta is a popular measure of stock volatility relative to the market. The market’s beta (we use the U.S. Total Market Index) is 1.0. The individual stocks betas, which we rank based on on 15 years of historical price data, may be above, below, or at 1.0. 

Standard deviation (σ) is the traditional measure of total risk, measuring the dispersion of stock price relative to its mean. The higher the standard deviation the greater the stock price volatility and risk.  The standard deviation of the fully diversified  S&P 500 is about 20% annualized.

The 40-week moving average and 52-week CLV are unique features in our Risk Score. Our logic is sound here: stocks almost always revert to their mean eventually. Stocks trading significantly above their 40-week moving average can be expected to come back down and “tag” this moving average, even if the secular price trend remains up. With stocks well above the 40-week moving average, we can say that risk is to the downside. On the other hand, stocks that have sold off and are trading well below their 40-week moving average generally have more upside potential and reduced downside risk.  Similarly, with the 52-week CLV, a stock trading at the high end of its 52-week range typically implies that traders have built up profits in the stock, therefore the risk of profit-taking and downside price action is higher. Conversely, a stock trading at the low end of its 52-week range has less risk of profit-taking.

Our Risk Score is placed on a scale of 5 to 1.  A stock with a Risk Score of 5 has the most risk (combination of high volatility and lofty price). On the other end, a stock with a Risk Score of 1 has the least risk (combination of low volatility and and beaten down price). A Risk Score of 3 is considered neutral.