Our Research Methodology

A Methodical Top-Down Approach and Tactical Asset Allocation Strategy

We at Frazier & Mayer Research, LLC, the providers of Investors Monitor, use a methodical, top-down approach to investing and speculating in the financial markets, and to advise our clients of how to allocate their financial market assets during any given period.

That process begins by analyzing the macro economic, geopolitical and financial environment and ends by selecting the asset classes, economic sectors and individual securities that our investment models indicate are appropriate for a given environment.

The Macro Environment

Every month, we review and analyze more than 100 economic variables and factors that affect household spending, business investments, corporate profits, interest rates, inflation, and worldwide economic activity.

We also analyze, on a regular and ongoing basis, data regarding purchases and redemptions of mutual funds and data that reveal investors’ perceptions of worldwide economic conditions. Additionally, we review information on demographic trends, geopolitical developments, and new legislative proposals.

We use the information gleaned from our extensive research to determine the stage of the economic (business) cycle at which different countries around the world appear to be operating during any given period and to forecast the future direction of worldwide economic activity.


Those determinations and forecasts are integral components of our integrative investment selection process. That’s because different asset classes and economic sectors tend to perform differently during different types of economic environments and during different phases of the economic cycle.

For example, stocks tend to perform best when economic conditions are improving and corporate revenues are increasing, which generally occurs during the recovery and expansion phases of the economic cycle. In contrast, stocks tend to perform worst when economic conditions are deteriorating and corporate profits are declining, which often occurs during the contraction phase of the economic cycle.

In contrast, bonds tend to perform best when interest rates are declining, which generally occurs during the late-contraction phase of the economic cycle, and to perform worst when interest rates are rising, which generally occurs during both the late-expansion and peak phases of the economic cycle.

Our Tactical Asset & Sector Allocation Model and Frazier’s “Buy-Sell” Index

A major  component of our investment selection process is our Tactical Asset & Sector Allocation (“TASA”) Model, which we use to forecast the future direction of worldwide economic activity and to determine the primary asset classes and economic sectors in which we advise our clients to allocate their capital during any given period. That model consists of numerous leading economic and stock market indicators, as well as several technical and investor sentiment indicators.

Every month, we input the readings on our TASA Model into an algorithm that we use to compute the value of an economic and stock market forecasting indicator that we refer to as our Buy-Sell Index.

Values on that index that are equal to or higher than 40 indicate that economic conditions in the United States will deteriorate, and that U.S. stock prices, in general (as measured by the major U.S. stock market indices), will trend lower over the ensuing 3-18 months. In contrast, values on that index that are equal to or lower than -40 indicate that economic conditions in the United States will improve, and that U.S. stock prices, in general, will trend higher over the ensuing 3-18 months.

Therefore, when the reading on our Buy-Sell Index is greater than or equal to 40, we generally advise our clients to allocate a large portion of their financial market assets to cash-like investments (i.e. money market securities), and when the reading on our Buy-Sell Index is less than or equal to -40, we generally advise our clients to allocate a large portion of their assets to equity securities, commodities and real estate.

The History and Forecasting Accuracy of Our Tactical Asset & Sector Allocation Model and Associated Buy-Sell Index

Our President and Chief Market Strategist, David N. Frazier, designed our Tactical Asset & Sector Allocation Model and associated Buy-Sell Index shortly after he graduated from college during 1986. Since then, Frazier has used that model and stock market forecasting indicator to guide his personal investment decisions and to help others to avoid the big downturns and to profit from the major upturns in the financial markets.

For example, during February 2000 Frazier advised investors to get completely out of the stock market because his TASA model had flashed a sell signal during that month. Over the next two and a half years, investors who followed Frazier’s advice were able to preserve the value of their capital while the S&P 500 Index lost 47% of its value from March 2000 to October 2002.

In a similar manner, Frazier advised investors during September 2007 to sell all of their stock holdings and to invest a portion of their money into investment vehicles that increase in value when stock prices in general decline – into inverse-equity ETFs – because his TASA model and associated Buy-Sell Index had given another sell signal. As a result of that decision, Frazier’s  Conservative Portfolio declined by only 4.7% from October 2007 to the end of 2008 while the S&P 500 Index lost 41% of its value during that period. During that same period, Frazier’s Aggressive Portfolio appreciated by 11% while many investors experienced devastating losses in the value of their portfolios.

In contrast, throughout much of the 1990s, as well as from March 2003 to June 2007 and for most of the period from March 2009 to May 2015, Frazier advised investors to allocate a large portion of their money to stocks and equity ETFs because the readings on his TASA model were in positive territory during those periods.

In regard to other periods in the past, a back-testing of Frazier’s TASA Model and associated Buy-Sell Index to December 1969 shows that his model and stock market forecasting indicator has correctly forecast every major turning point in the U.S. stock market within three months of peaks and troughs in the S&P 500 Index market.

Frazier’s Sector Relative Performance Model

In addition to using our Tactical Asset & Sector Allocation Model to forecast the future direction of worldwide economic activity and to determine which asset classes and economic sectors to advise our clients to allocate their capital during any given period, we use a Sector Relative Performance Model to reveal which economic sectors are performing well during a given period and to forecast the short-term direction of stocks, bonds and commodities.

Specifically, every week we rank the performance of the 10 major economic sectors tracked by Standard & Poor’s to determine which sectors improved and which ones deteriorated, in terms of the relative price-performance of stocks that compose those sectors. Next, we determine the weighted-average ranking of those sectors over the most-recent six weeks by assigning higher weights to the relative price-performance of those sectors during recent weeks and lower weights to the relative price-performance of those sectors during weeks.

We postulate that sectors that performed well during the recent past will continue to perform well over the very near term, and that sectors that performed poorly during the recent past will continue to perform poorly over the near term. Those assumptions are based on our founder’s extensive experience in investing, speculating and trading in the financial markets, which has shown that financial market participants tend to gravitate towards sectors that recently performed well – by bidding up the prices of securities of companies that operate in those sectors – and to avoid sectors that recently performed poorly by either selling or not purchasing securities of companies that operate in those sectors.

In essence, our Sector Relative Performance Model is a price-momentum model that applies a theory first postulated by Sir Isaac Newton in his universal law of motion – an object in motion will remain in motion unless acted upon by an external force.

We use our Sector Relative Performance Model, primarily, to confirm (or disconfirm) the readings on our Tactical Asset & Sector Allocation Model. For example, if our TASA Model were to forecast that stocks of companies that operate in the technology sector would likely be among the better-performing stocks over the next few months, and our Relative Performance Model were to reveal that stocks of companies that operate in that sector had, in fact, been improving, in terms of their relative price-performance, during the recent past, we would be confident that our TASA Model were correctly forecasting the future direction of stocks of companies that operate in the technology sector.

In addition, if our TASA Model were to forecast that the pace of worldwide economic activity would increase over a period of approximately three months into the future, and our Sector Relative Performance Model revealed that stocks of companies that operate in the technology, financial services, and consumer discretionary sectors – stocks of cyclical companies – had consistently outperformed stocks of companies that operate in the healthcare, consumer staples and telecommunications sectors – stocks of ”defensive” companies – during the recent past, we would feel confident that our TASA Model were correctly forecasting an increase in the future pace of worldwide economic activity. That’s because stocks of companies that operate in cyclical sectors tend to out-perform stocks of companies that operate in defensive sectors during economic expansions and during periods in which the pace of economic activity is increasing. In contrast, companies that operate in defensive sectors tend to out-perform stocks of companies that operate in cyclical sectors during economic recessions and during periods when the pace of economic activity is decreasing.

In the first scenario describe above – when Frazier’s Tactical Asset & Sector Allocation Model were indicating that the future pace of economic growth would likely increase, and our Sector Relative Performance Model revealed hat stocks of cyclical companies had recently been out-performing stocks of defensive companies – we would likely advise our clients to allocate a large portion of their money to equity securities and to stocks of companies that operate in cyclical sectors of the economy.

In contrast, if our TASA Model were to forecast that the future direction of worldwide economic activity would likely increase, but our Sector Relative Performance Model had revealed that stocks of companies that operate in defensive sectors had consistently outperformed stocks of companies that operate in cyclical sectors during the recent past, we would conduct further research before assuming that our TASA Model were correctly forecasting the future pace of worldwide economic activity.

The chart below shows the relative price-performance, on average, of Standard & Poor’s ten major economic sectors over the six weeks ended April, 2011.


Frazier’s Stock High-Relative-Price-Strength Index and His Overbought-Oversold Indicator

In addition to the investment models described above, Frazier uses a Stock High-Relative-Price-Strength Index and an Overbought-Oversold Indicator to determine opportune times to get in and out of the stock market.

Frazier’s Stock High-Relative-Price-Strength Index

Frazier’s Stock High-Relative-Price-Strength Index is based on the concept that stock prices, in general, tend to move in the same direction as stocks of leading growth and/or cyclical companies.

Specifically, Frazier has found that stock prices, in general, as measured by the S&P 500 Index, tend to trend higher for several months after the stocks of leading growth and/or cyclical companies bottom and begin to move higher, and that stocks, in general, tend to pull back considerably after the stocks of leading growth and/or cyclical companies peak and begin to move lower.

As you can see from the chart below, the S&P 500 Index did in fact pull back considerably following a peak in the average price of 62 high-relative-price-strength stocks on May 3, 2010, and again on May 10, 2011, as well as on July 8, 2011. When that group of high-relative-price-strength stocks fell below the lower boundary of its upward-trending price channel on August 3, 2011, the S&P 500 Index fell sharply over the next week.

 

Frazier’s Overbought-Oversold Indicator

Although Frazier relies, primarily, on the readings on his Tactical Asset & Sector Allocation Model, as well as the readings on his Sector Relative Performance Model and his Stock High-Relative-Price-Strength Index to determine his recommended investment allocations during any point in time, he uses a stock market overbought-oversold indicator to determine opportune times to trade in and out of stocks and/or equity ETFs on a very short-term basis.

As you can see from the chart below, Frazier’s Overbought-Oversold Indicator peaked on May 3, 2011 and again on July 8, 2011, indicating that stock prices, in general, were trading at substantially overbought levels on those dates.

 

Frazier’s Macro Analysis Investment Decisions and the Performance of the S&P 500 Index

As you can see from the information and charts presented above, Frazier’s investment-timing models and financial market indicators have been very reliable in forecasting major turning points in the U.S. stock market.

In regard to the recent downturn in the U.S. stock market, Frazier’s Sector Relative Performance Model flashed a warning signal on April 29, 2011, with that model revealing that stocks of companies that operate in so-called “defensive” sectors of the U.S. economy had outperformed stocks of companies that operate in all of the other major economic sectors over the six weeks ended 4/19/11, while stocks of companies that operate in cyclical sectors had performed poorly during that period.

A few days later, on May 3, 2011, Frazier’s Overbought-Oversold Indicator peaked, suggesting that stock prices, in general, were due for a pullback.

Five trading days later, on May 10, 2011, Frazier’s Stock High-Relative-Price-Strength Index peaked and then declined substantially during the ensuing weeks.

Less than two weeks later, on May 20, 2011, Frazier’s Buy-Sell Index, which is computed from the readings on his proprietary Tactical Asset & Sector Allocation Model, gave a sell signal, confirming the readings on his other models and indicators and suggesting that stocks would trend lower during the ensuing months.

As a result of Frazier’s economic analysis during April 2011, and the readings that registered on his investment models and indicators from April 29, 2011 to May 20, 2011, Frazier advised financial market participants to sell all of their stock holdings, and to allocate 100% of their financial market assets to money market securities, during May 2011. Over the ensuing months, from May 3, 2011 through October 31, 2011, the S&P 500 Index lost 7.0 percent of its value, including dividends, while investors who followed Frazier’s advice were able to preserve the value of their capital during that period.

Note: Although the readings on Frazier’s models and indicators tend to peak and trough at about the same time, there has been no particular sequence, historically, in which the readings on those models and indicators have peaked and bottomed.
For example, during certain periods in the past, the readings on Frazier’s Buy-Sell Index bottomed or peaked –  gave a buy or sell signal – before the readings on his other models and indicators bottomed or peaked.
During certain other periods, as in the example presented above, Frazier’s Sector Relative performance Model was the first of his models to give a buy or sell signal.
Because of the lack of uniformity in the sequence in which Frazier’s models and indicators tend to generate buy and sell signals, Frazier generally waits for at least two of his investment models and indicators to register a buy or sell signal before he advises investors on ways to allocate their financial market assets during any given environment.

Stock and ETF Selection Models

After forecasting the stage of the economic cycle in which worldwide economies will likely operate over a period of approximately three months to eighteen months into the future, and determining which asset classes and economic sectors seem poised to perform well during any given investment environment, Frazier selects the specific types of investments that he’ll recommend during a given period.

When his models indicate that worldwide economic conditions will likely deteriorate, and that stock and commodity prices will likely trend lower for several months, he generally recommends for investors to allocate a large percentage of their financial market assets to cash-like investments, such as money market funds and/or short-term bank certificates of deposits (“CDs”).

In contrast, when his models indicate that economic conditions will likely improve substantially, and that stock and commodity prices will likely trend higher for several months, he generally recommends for investors to allocate a large percentage of their financial market assets to common stocks and/or to equity- and commodity-ETFs, as well as to real estate investment trusts (“REITS”). In addition, he regularly reviews the readings on both his Tactical Asset & Sector Allocation Model and his Sector Relative Strength Model to determine in which economic sectors (and industries that compose those sectors) he’ll advise investors to allocate the majority of their capital. For those sectors and industries, Frazier then reviews and analyzes every publicly-traded stock and ETF that meets his quantitative investment criteria.

In regard to the ETFs that meet Frazier’s quantitative criteria, he compares the following attributes of those ETFs to determine which of those securities he’ll recommend to investors:

  • The type and number of stocks held by those ETFs.
  • The average daily trading volume of those ETFs.
  • The reward-to-risk characteristics of those ETFs.
  • The ways in which those ETFs performed, historically, during different types of economic environments.

In regard to the stocks that meet Frazier’s quantitative criteria, he conducts the following analysis to determine which stocks he’ll recommend to investors: fundamental company analysis, stock valuation analysis, and stock timing analysis.
Company Analysis

In conducting his fundamental company analysis, Frazier focuses on companies that possess the following characteristics:

  1. Products / Services: Companies that offer revolutionary products/services or companies that recently began offering products/services that appear to be poised to generate substantial demand during the foreseeable future.
  2. Limited Competition: Companies that have very few competitors or that have demonstrated that they are dominant players and/or leaders in their fields of endeavor.
  3. Strong Financial Condition: Companies that are strong financially – that have low levels of debt and that are able to pay their recurring financial obligations out of their available cash and/or trade accounts receivable.
  4. Rapidly-Growing Revenues and Earnings: Companies that grew their revenues and operating earnings at rapid rates over the past 18 months and that appear to be in a position to continue to grow their revenues and earnings at fast rates during the foreseeable future.
  5. Publicly-Traded for More Than Two Years, But Less Than 10 Years: Companies whose stocks have been publicly traded for at least two years, but for less than 10 years.

In addition to companies that possess the criteria outlined above, during the early stages of economic recoveries Frazier also focuses on cyclical companies that have implemented restructuring initiatives and that appear to be in the process of substantially improving their financial operating results; (those types of companies are often referred to as “turnaround” opportunities).

Note: Frazier’s research has shown that stocks of companies that, historically, possessed the characteristics outlined above were among the bigger stock market winners over the past 50 years.

Stock Valuation Analysis

After narrowing down his list of stock candidates by analyzing important data on the underlying companies that meet his fundamental company analysis, Frazier reviews the relative value of those stocks to determine which of those stocks he might recommend to investors. Two of the primary variables that Frazier reviews to determine a stock’s relative value are the Price-to-Earnings Growth (“PEG”) ratio and the institutional demand for given stock.

PEG Ratio

The PEG ratio reveals the value of a stock in terms of the future earnings capacity of that stock’s underlying company.

Specifically, the PEG ratio compares a stock’s price-to-earnings (“P/E”) ratio to its company’s expected average annual compounded earnings growth rate over approximately three to five years into the future.

For example, if a company’s stock had a P/E ratio of 30 and that company’s earnings per share were expected to grow at an average annual compounded rate of 30 percent over the next five years, the company’s stock would have a PEG ratio of 1.0; (PEG = (P/E) / EPS Growth Rate: 30/30 = 1.0).

Stocks of companies that are correctly valued by investors have PEG ratios equal to 1.0. In comparison, stocks that have PEG ratios greater than 1.0 are overvalued, while stocks that have PEG ratios less than 1.0 are undervalued, in terms of the present value of those companies’ expected future earnings.

In general, Frazier considers stocks of companies that have PEG ratios considerably less than 1.0 to be trading at bargain prices.
Institutional Demand

In regard to the institutional demand for a stock, Frazier assumes that stocks which institutional investors are acquiring are more valuable than stocks which those investors are either selling or uninterested in acquiring – that stocks which institutional investors are acquiring have a better chance of appreciating than stocks which institutional investors are selling.

That’s because institutional investors tend to determine the price direction of most stocks due to the large size of those investors’ stock transactions, as compared to the size of stock transactions that are executed by individual investors.

Secondly, Frazier recognizes that stocks that are owned by a relatively small number of institutional investors at a given point in time, but whose institutional ownership is increasing rapidly, will likely appreciate at a faster pace than stocks that a large number of institutional investors already own. That’s because the price of any given stock is ultimately determined in the same way that the price of any other good or service is determined – by the supply of and demand for the stock.

Hence, if, at a given point in time, a small number of institutional investors own a stock, but the institutional demand for that stock were to rise sharply during a short period of time – an increasing number of institutional investors were buy the stock, relative to the number of those investors who sell that stock – then the price of that stock would likely rise sharply during a short period of time.

Therefore, Frazier seeks to identify stocks that are owned by a relatively small number of institutional investors, but whose institutional ownership is rapidly increasing.
Stock Timing Analysis

Once Frazier completes both his fundamental company analysis and his stock valuation analysis, he reviews the trading action of stocks that meet his fundamental and valuation criteria.

Specifically, he monitors and analyzes the price and trading volume of those stocks, as well as several price-momentum indicators for those stocks, to determine if any of those stocks appear to be over-bought or over-sold by most investors at a given point in time.

If the trading action of a stock that meets his fundamental and valuation criteria indicates that the stock is over-sold, Frazier generally recommends for investors to buy that stock.
Risk Management

As you can surmise from the foregoing discussion, our co-founder and President, David N. Frazier, employs a systematic approach to determining the investment recommendations that he makes during any given period.

Yet, he never assumes that his economic and financial market forecasts will turn out to be correct or that his securities recommendations will perform in a way that his investment models and analyses had initially indicated.

Therefore, when a security that Frazier had recommended for purchase falls by more than a few percent below his recommended purchase price, he monitors that security’s trading action very closely, and he does further research, to determine if he might have overlooked some important factors and/or developments that are negatively affecting (or might soon negatively affect) the security.

When Frazier’s research indicates that he did overlook some negative factors and/or developments, he generally recommends for investors to sell the security – even at a loss.

However, when Frazier’s research indicates that the fundamental reasons for which he had recommended a security remains intact, he generally recommends for investors to continue holding the security.

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