Discretionary

The Twowaymarkets Managed Portfolio (TMP)

Strategy

The Twowaymarkets’ approach to the management of the TMP is a three-step process:

1) FTSE short term forecast
2) Stock selection
3) Hedging

Before any investment decision is made, TWM will define the FTSE short term forecast. Afterward, all stocks picked for the portfolio will be selected according to the FTSE short term forecast.

1) FTSE short term forecast

The FTSE short term forecast is an essential part of the investment process and tells us the likely direction of the FTSE over the next few days. The analysis is based on three analytical tools: Elliott Wave Principle, Bullish Trend Indicator (BTI) and Top 20 Differential.

The Wave Principle is a detailed description of how groups of people behave. It reveals that mass psychology swings from pessimism to optimism and back in a natural sequence, creating specific and measurable patterns.
One of the easiest places to see this phenomenon at work is in the financial markets, where changing investor psychology is recorded in the form of price movements. If you can identify repeating patterns in prices, and figure out where in those repeating patterns we are today, then you can predict where we are going in the future.
The Elliott Wave Principle is named for its discoverer, Ralph Nelson Elliott. Mr. Elliott completed the bulk of his work on the Principle in the 1930s and 1940s.

The Bullish Trend Indicator (BTI) is a sentiment indicator developed by Thierry Laduguie. This unique indicator tells us whether investors are bullish or bearish at a specific time regardless of the state of the fundamental news. This is very important because when investors are in a bullish mood there is a high probability that any market decline will be followed by a fresh advance. For example when the daily news is positive, one would expect the market to rise. However, a rising market accompanied by negative news would be extremely bullish for stocks. The BTI measure the level of bullishness among market participants.

Each day an analysis is made of the impact of corporate and economic news on the FTSE 100.  A daily news value is calculated, which is a function of how good or how bad the economic and corporate news is. Determining how investors will react to this news provides TWM with an additional edge in considering it’s investment decisions. A rising BTI is bullish while a declining BTI is bearish. A longer term version of the BTI, the 34-day BTI, is used to define the long term trend in stocks. A positive 34-day BTI is associated with bull markets while a negative value is associated with bear markets.
 
The Top 20 Differential indicator detects short term overbought/oversold levels in the market. This indicator measure how fast the top 20 stocks by market capitalisation move in relation to the FTSE 100 at the end of their respective Elliott waves. The indicator can move between -3% (oversold) and +3% (overbought). These levels assist TWM in determining the levels at which the FTSE will turn (Make a bottom or a top).

2) Stock selection

Once the FTSE short term forecast is defined, we will select stocks that fit with the forecast in term of correlation and Elliott wave pattern. For example if the FTSE forecast is bullish we will select stocks with a high beta and with a bullish Elliott wave pattern. In a bearish market we will select stocks with low beta.

3) Hedging

In addition to selecting the right stocks, the TMP portfolio always includes a short position in the FTSE 100. In that way the risk can be leveraged and controlled more effectively. For example the TMP could be 200% long of stocks and 100% short of the FTSE – This would result in a gross exposure of 300% but most importantly a net exposure of 100%*. The net exposure is constantly adjusted according to the FTSE short term forecast. In bull markets our net exposure can go up to 100% and in bear markets our net exposure would be neutral (0%) and sometimes negative.

*The percentage risk description refers to the normal risk multiple of 1 applied to a managed account within the TMP. Clients can instruct to increase this exposure, for example to 1.25, which would result in risk being increased a function of 1.25. This should be discussed with the managers and the implications of this feature fully understood.

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Should you have any questions, please call +44 (0) 207 099 1138 to speak with a dealer