F O R M U L A R E S E A R C H TM Quantitative Treatment of the Financial Markets Volume VII, No. 2 September 10, 2003 Nelson F. Freeburg, Editor Notes & Comments THE MONITOR SERIES : LEADING MARKET PROFESSIONALS SHAR E UNCOMMON INSIGHTS { Don't Miss Part II Synergy and Collaboration: The Asset Management Team of Tom McClellan and Roger Kliminski, Part I As sometimes happens, the material developed in this study proved to be richer and more Two Analysts with Bold Vision Achieve Market-Beating Returns extensive than a single report can accommo- date. To do justice to the findings I had to divide the study into two parts. You will receive the second installment in a couple of weeks. ver thirty years ago market analyst Sherman McClellan and his There we present some of the most profitable O and risk-averse timing methods we have ever mathematician wife Marian introduced a revolutionary market featured. timing tool. Today the McClellan Oscillator stands as one of the most { Help for Market Professionals... popular and effective technical indicators of all time. I am privileged to serve money managers The McClellans went on to create a host of advanced technical of distinction in 26 countries. It's been a pleasure to come to know many of you methods. Ten years ago their son Tom joined the research effort. A personally, even if by the exquisitely West Point graduate who served as an Army helicopter pilot, Tom retired remote medium of email. from active duty as a captain. In 1995 Tom and Sherman, after much As you know, over the past few years preparation and research, founded a first-rate market advisory service. I there has been a lot of consolidation and cost-cutting in the U.S. financial industry. closely follow the McClellan Market Report and its companion service, the Due to the retrenchment, many skilled Daily Edition. Tom presides over both publications in consultation with young professionals have suddenly found Sherman. themselves without jobs. Some of these bright and energetic individuals have sought out my help. Given the family's signature contribution to the field, one aspect of My pitch: If you are a money manager or the McClellan approach to technical analysis may come as a surprise. The investment advisor in a position to hire, at McClellan Oscillator is by no means the centerpiece of the analytic effort. any given time I can put you in touch with a small roster of highly qualified market Yes, the eponymous indicator plays a featured role. analysts and traders. Please let me know (Continued on Page Two) if I can help in any way. … Zweig Bond Timing Model--March 1993 In his 1987 book Winning with the New IRAs, Martin Zweig presented a simple but power- ful fixed-income timing model. The model (which was developed by Ned Davis Research) combines trend-following elements with fundamental inputs. We featured the Zweig bond model in our March 1993 issue, where we added a few refinements. All versions of the model have continued to perform well since then. Going back to 1970, our variant returned 12.9% a year compared to 10.2% for the Dow Jones Corporate Bond index. Maximum drawdown was held to 4% compared to 21% for buy-and-hold. The chart at left shows recent signals applied to the Fidelity Invest- ment Grade Bond fund (FBNDX). Copyright ©2003, Reprinted by McClellan Financial Publications by special permission. All Other Rights Reserved FORMULA RESEARCH, Inc., 4646 Poplar Ave, Suite 401, Memphis, TN 38117, A twelve-issue subscription is $295. A six-issue trial is $175. Overseas surcharge: 20%. (901) 756-86079710 9 TM Volume VII, No. 2 F O R M U L A R E S E A R C H Page 2 Quantitative Treatment of the Financial Markets But Tom's commentary ranges far devoted to timing interest rates, precious { Philadelphia Area Subscribers beyond, tapping a rich array of diverse metals and the stock market. We'll timing methods and technical tools. It is present systematic strategies for all three John Durham of tempting to think of Tom as a one-man sectors based on Tom (and Sherman's) Villanova, PA would like to contact Ned Davis Research--a dogged individual original research. subscribers in that doing the work of an entire team of first- area to exchange views, programming rate institutional analysts. Be advised that Tom himself is not a tips and related strictly mechanical trader. While he relies ideas. You can reach John at (610) Of course, Tom continues to benefit on rigorous historical testing, Tom blends 519-0867. Email: from his father's insights. (For one thing, his findings with personal insights from pd23@ Sherman's hawk-eyed text editing helps dozens of timing tools, most of them mindspring.com. make Tom's prose some of the most liter- unorthodox. ate and polished in the field.) Meanwhile, several years ago Tom entered into a This mix of quantitative research and money management partnership with intuitive judgment has served Tom well as Roger Kliminski. a market analyst. According to Timer Digest, a ratings service that tracks over Roger is a gifted market analyst, an 100 market advisory programs, Tom ranks experienced portfolio manager and a No. 2 for long-term stock market longtime friend of Formula Research. I forecasting over the past five years and have seen the independent performance No. 3 for intermediate timing. Tom ranks rankings and Global Investment No. 1 in precious metals timing for the Solutions, the partners' money manage- same period. ment arm, has consistently beaten the † For information on market with low levels of risk. Tom's body of research ranges so the McClellans’ twice monthly newsletter and widely we can't begin to feature every Daily Edition, visit their We'll touch on Roger's contribution unique indicator here. If you explore his web site at at the end of this report and in greater work in depth, you'll be treated to a fasci- www.mcoscillator.com detail in Part II of this two-part study. In nating array of innovative timing methods. or call (800) 872-3737 particular, we'll highlight a key feature of Interested in precious metals? Follow or (253) 581-4889. If you prefer to write, the price behavior that counts as an authentic Tom and plot the difference between address is: market discovery. Building on these 1-month and 12-month gold lease rates, as McClellan Financial Publications, Inc. findings, we'll develop two timing models reported by the London Bullion Market P.O. Box 39779 that show gains of better Lakewood, WA 98439 than 25% a year. z The fax number is (253) 584-8194. 25% $600 Cash Gold Offset 15 Months Forward The McClellan 20% (Scale Right) Research Imperative: $400 15% Quest for Innovation 10% $200 For now we focus Higher 5% Rates on the McClellan side of 90-Day T-Bill Yield ??? (Scale Left) the partnership. Tom's 0% $0 principal efforts are 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 TM Volume VII, No. 2 F O R M U L A R E S E A R C H Page 3 Quantitative Treatment of the Financial Markets Association. You'll find the spread revealing. 16% U.S. Unemployment Rate 10% 14% Lower (Scale Right) Unemployment Trade fixed income? 12% ??? 8% Take a leaf from Tom's 10% 6% book and track Commit- 8% CPI Inflation Rate 4% ment of Traders data for Offset Forward 2 Years 6% (Scale Left) copper futures. When 2% commercial copper 4% 0% traders get heavily net 2% long or short, bond 0% -2% prices tend to go in the 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1996 1997 1998 1999 2000 2001 2002 2003 2004 opposite direction. I could cite many other by about two years. The fit is not perfect examples of offbeat but inspired but the overall symmetry is impressive. z indicators. One favored McClellan timing method is intermarket correlation. The The Goldollar Index idea is to select a market with concrete forecasting significance for a second market, which tends to follow with a Intermarket pioneers like John predictable lag. You can then synchronize Murphy and Martin Pring have long the parallel swings by realigning the time pointed out that precious metals tend to scales. Tom did not invent this method move opposite the U.S. dollar. A strong of analysis, but I can affirm he is an expert dollar is generally bearish for gold and practitioner. silver while a weak dollar is bullish. Trends in precious metals can sometimes The chart on the previous page is an depend more on currency dynamics than illustration. You can see that trends in fundamentals unique to that sector. gold are echoed in short-term interest rates about 15 months later. Based in part A rally when gold is priced in dollars on this association Tom correctly forecast may appear as a sideways trading range or the recent surge in T-bill rates. even a pullback when gold is priced in another currency. To factor out the Of course, such intermarket align- effect of exchange rate flux, Tom multi- ments don't always hold up. Sometimes plies the price of gold by the U.S. Dollar extraneous events can confound the Index. The result is what he calls the projection. In other cases the market Goldollar Index, a reflection of the trend rhythm abruptly fades out, which is why in gold isolated from movement in the Tom relies on confirmation from multiple dollar.