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  • Workshops Van Tharp's Cornerstone Workshops
  • Article Research on New Ways to Manage Your Portfolio by Van K. Tharp, Ph.D.
  • Trading Education Take charge of your trading success!
  • Trading Tip Gold Trend: The Pause That Refreshes by D.R. Barton, Jr.
  • Mail Bag Options and Position Sizing


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Feature Article

Research on New Ways to Manage Your Portfolio


Since the crash in the fall of 2008 and the bottom in March 2009, I have been fascinated by how the market has been behaving.  First, while the overall market made a record recovery, it was difficult to find any consistent trends.  One area of the market would be the strongest one month, only to be the weakest the next month.  That doesn’t happen in most markets.  Usually, the strongest sectors stay the strongest for some time.

As a result, just for my own interest, I’ve decided to do a monthly study of the strongest and weakest stocks and ETFs.  I look at multiple screens:

  1. an SQN® 1001 screen of the S&P 500
  2. an SQN® 100 screen of the top ETFs, and  
  3. a positive and negative efficiency screen2 of the entire stock market.

In each case, I’ll look at all my screens and decide the best and worst stocks based on their price.  What’s classified as best or worst depends on my own subjective interpretation of which charts look efficient to me. For the worst negative candidates, I’m looking for prices above $25 per share.  For the best positive candidates, I’m looking for prices above $10 (unless it’s an ETF).  These candidates, by the way, are not recommendations to buy or sell.  This is purely a personal interest project, but I hope it will be educational for you.

I expect positive stocks to go up and negative stocks to go down (but these days it might be the opposite).  Anyway, with an equal number of long and short stocks both portfolios will be neutral.  I’ll continue my research over the next six months unless the market type changes dramatically.

First, we’ll establish a $100,000 portfolio in which we buy the five best stocks and short the five worst stocks.  There will be no stops; we’ll just adjust the portfolio monthly when we have new candidates.  We will go long on each of the best stocks with 10% of the portfolio and short the worst stocks with 10% of the portfolio.  It should be a fairly neutral portfolio as the longs and shorts will contradict each other.  We’ll call this the normal portfolio.

We’ll establish a second $100,000 portfolio in which we short the five best stocks and buy the five worst stocks.  We’ll call this the contrary portfolio and theoretically invest $100,000 with no stops with monthly adjustments.  As with the normal portfolio, each position will be 10% of the portfolio.  Again, longs and shorts will theoretically offset each other (i.e., it’s also a neutral portfolio).

Are you wondering why I’m doing this?  The answer is simply because I’m very curious. There are no stops because this is a neutral portfolio, and I want see what happens to these stocks over a month—and right now I have no idea where I’d logically set them (10% change?).  Again, this study is by no means a recommendation of any methods or any stocks.  We’ll open positions in the two accounts at opening price on Monday, June 21st because I did the screens over the weekend. 

My four best stocks are HSY (Hershey), NFLX (Netflix), AKAM (Akamai Technologies), and CRUS (Cirrus Logic).  My pick for the best ETF is IIH (Intranet Infrastructure Holders).  They are all above 15 in price (except the ETF) and the price chart looks pretty efficient based on my subjective point of view.  I captured the charts on June 22nd, so we have an immediate bias with these for the contrary portfolio.  This perhaps shows the value of buying on a retracement.

The five charts are below.

chart one

chart 2

My four worst stocks are BP (British Petroleum), MON (Monsanto), CF (CF Industries), and BLK (Blackstone).  My worst ETF pick is FXE (Euro funds).  All of the stocks are still above 30, so they have plenty of downside room.

The charts are below.

chart 2


chart 2

This sets up our two portfolios.  The charts show the prices as of Tuesday, June 22nd at about 2 PM.  We entered on the open on Monday, June 21st.

Normal Portfolio

Stock (long/short)

Price / Shares

Opening Value

AKAM (long)

46.72  (214)


CRUS (long)

18.60  (537)


HSY (long)

50.62  (197)


NFLX (long)

126.04  (79)


IHH (long)

3.64 (2750)





BP (short)

30.64 (326)


MON (short)

50.96 (196)


CF (short)

65.42 (153)


BLK (short)

160.78 (62)


FXE (short)

123.42 (81)


Value on open 6/25/2010




Contrary Portfolio

Stock (long/short)

Price / Shares

Opening Value

AKAM (short)

46.72  (214)


CRUS (short)

18.60  (537)


HSY (short)

50.62  (197)


NFLX (short)

126.04  (79)


IHH (short)

3.64 (2750)





BP (long)

30.64 (326)


MON (long)

50.96 (196)


CF (long)

65.42 (153)


BLK (long)

160.78 (62)


FXE (long)

123.42 (81)


Value on open 6/25/2010



On Monday July 19th I will reassess the value of the two portfolios by section, and we’ll adjust the positions. 

Questions and Answers

I don’t plan to answer individual questions like, “Why did you do this?” or “What are your criteria?”.  But if we get a lot of individual questions, I’ll address them in the next article as I’ve done with the questions below.  My staff had enough questions for all of you.  They included the following, plus I anticipated some more that you might have.  

Why a neutral portfolio? 

I can make money on both sides and being both long and short gives me some great protection.  Hedge funds originally got their name from being both long and short.  In addition, I plan to look at this study in six parts:  1) The normal portfolio; 2) the contrarian portfolio; 3) going long on the best stocks; 4) shorting the worst stocks; 5) going long on the worst stocks; and 6) shorting the best stocks.

Why aren’t you using stops? 

I mentioned before that I have no idea where I’d logically set the stops.  If I use stops, it’s a confounding variable that will just confuse the issue but answer the question, “Will I get stopped out?”.  In a highly volatile environment (which is quite possible in this climate), I could be stopped out and still be correct about the position.  Finally, I think the neutral portfolio somewhat mitigates the need for stops.

If you are not using stops, how will you assess R? 

I’ll look at the average change in the first month (up or down) and call that 1R.

Why are you doing this? 

I had some questions that I want answered.  In addition, I’m also looking at this as a way to manage some of our retirement portfolio. Remember that I’m simply doing a research project.  This has to be forward tested because my criteria are subjective and cannot be measured.  If you think things should be done differently, that’s fine.  But I’m happy because I’m doing it “my way.” 

What are your subjective criteria for efficiency?

For me to consider a stock efficient, it must be moving up and in a straight line with very little noise.  None of the long stocks are that efficient, but they are the best I could find.  Most of the short stocks (except the ETF) look fairly efficient.  Just look at the charts.

Do you plan to use only one ETF each month?

No, I’ll try to use at least one, but if there are five good stocks and no ETFs, I’ll use the five good stocks.  If there are five good ETFs, then I’ll use those.


  1. Here we are doing an SQN® of the daily percent change in the closing price over the last 100 days.
  2. Here I am looking for a the change in price over 100 days divided by the ATR over that same 100 days.


About Van Tharp: Trading coach, and author, Dr. Van K. Tharp is widely recognized for his best-selling books and his outstanding Peak Performance Home Study program—a highly regarded classic that is suitable for all levels of traders and investors. You can learn more about Van Tharp at  


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Trading Tip

Gold Trend: The Pause That Refreshes



With gold prices making new all-time highs, gold is getting lots of press.  I’m frequently asked if people should be putting more gold into their portfolio.

I believe the answer is yes, but not yet.

Long term and from a fundamental perspective, it’s almost impossible to be anything but bullish on gold. With all the world’s central banks printing money as if it, well,  grows on trees, the valuation of gold as a relatively scarce commodity has to go up.  It’s only a matter of how long and how much.

In the shorter term and from the technical perspective, however, gold seems ripe for a pullback.

Most financial plans for overall portfolios would indicate that 5 – 10 percent of a person’s portfolio should be in gold or other hard assets.  If you are building up to that level or have the belief that a higher percentage is right for you, then buying gold on pullbacks would be prudent.

Let’s take a look at why gold might be overextended in the short term.

Valuation in Terms Other Than Dollars

For many investors, valuing gold in dollars per ounce  seems like a natural and universal way to look at the price of the precious metal.  With currency fluctuations and other considerations, however, looking at gold in terms other than dollars can help us understand the value of gold relative to other investments.  One of my favorite tools helps us see how many barrels of oil an ounce of gold will buy.  We can see that ratio for the last eight years in the chart below.

dr chart 1

As you can see in the chart above,  gold is the top line and crude oil is in the middle of the graph.  The lower line is the ratio of the two, or the number of barrels one ounce of gold will buy.

Over the past two years, this ratio has been extremely volatile, traveling well outside of its historical norms.  As the chart shows, the low end of the range over the past decade has been just below 5 barrels per ounce of gold.  The ratio peaked at 18 barrels per ounce at the height of the real estate/credit contraction crisis.

With this ratio hovering around 16 barrels per ounce now, we can see that gold remains relatively overbought.  While this is not a definitive analysis, it does point to a gold price that is historically stretched to the upside.

From a technical viewpoint, we can see that gold formed a price pattern related to a triple top in the past week.

dr chart 2

The triple top is pretty easy to see.  And the momentum indicators—Chaikin Oscillator (one of my very favorites), MACD and RSI—all show growing divergence with each new peak.  The upward trend line is also being tested.

If the price breaks this trend line, gold will most likely test the February low down in the $1050 range.  If that level holds, the intermediate outlook (the next 3 – 6 months) will look very bullish.

Adding gold to portfolios as either an inflation hedge or a crisis hedge is most likely prudent for many investors and traders.  Making those purchases at more savvy market points will help you add at more reasonable prices than when the entire crowd is jumping on board.

Great Trading,
D. R.


About the Author: A passion for the systematic approach to the markets and lifelong love of teaching and learning have propelled D.R. Barton, Jr. to the top of the investment and trading arena. He is a regularly featured guest on both Report on Business TV, and WTOP News Radio in Washington, D.C., and has been a guest on Bloomberg Radio. His articles have appeared on and Financial Advisor magazine. You may contact D.R. at "drbarton" at "".

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Options and Position Sizing

 Q: I am not sure where I originally learned of Dr. Tharp, but I recently listened to an interview by Robert Kiyosaki of Dr. Tharp back in 1998. I consequently have bought two books by Dr. Tharp. One problem that I currently am having is applying the position sizing rules to options. Since the option price can change with respect to underlying equity price by a given gain factor (or leverage), it would almost seem like getting stopped out for every trade is almost inevitable. I have only been trading for one year coming up next week. I also have downloaded the position sizing game, and am practicing with that.

A: As for stops, it’s the same for options as for other instruments—there are advantages and disadvantages to keeping stops very tight and getting stopped out frequently.  Likewise, there are advantages and disadvantages to making the stops very wide and getting stopped out less frequently.  Elements to consider when choosing between the two include your personal psychology, the trading system, market conditions, the type of instrument, and probably a few others. 

Good luck and have fun with the position sizing game.  You don’t get to practice setting stops in that game—that’s done for you.  There, you simply are trying to come up with position sizing strategies that get you to the next level. 

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June 23, 2010 - Issue 480


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Tharp Concepts Explained...

  • Psychology of Trading

  • System Development

  • Risk and R-Multiples

  • Position Sizing

  • Expectancy

  • Business Planning

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