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How To Read the Clarke Market Overview (CMO)

What is the CMO?

How do I get the CMO?

How to Read the CMO

The Title Page

The CMO Graph

-  What is a Performance Graph?

-  What is ACA?

-  Positive Developments (PD) and Negative Developments (ND)

-  Interpreting Signals

Table 1 Using Only Opposing Signals to Open and Close Positions

Table 2 Using Signals to Open Positions and Trailing Stops/Reversal of Direction to Close Positions

Notes on Entering and Exiting

Notes on Leveraged Funds

Notes on Inverse Funds

Notes on Whipsaws

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WHAT IS THE CMO?

The Clarke Market Overview graphs all tracked technical analysis indicator (TAI) for all active issues as a percentage of all possible positive developments. This line ranges between zero (not a single active issue has a single positive development) to one hundred percent (every active issue has all TAI showing positive). The movement of this line over certain levels can be used to guide investment timing.

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HOW DO I GET THE CMO?

The Clarke Market Overview is available via email and the web site. See How to Get the Clarke Market Overview (CMO).

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HOW TO READ THE CMO

The Clarke Market Overview is a technical analysis graph (sometimes called a chart) showing a special line compared to a subscriber selected issue or multiple issues. The graph is created with our special PHOEBE DRAW™ software, presented on a landscape page, and may be magnified greatly without sacrificing the clarity of graphics and text. The CMO is provided in Adobe Acrobat PDF format.

In the explanation below we will be referring to a CMO taken on 9/8/06 and compared to the NASDAQ 100 Trust Series (symbol: QQQQ) and MidCap SPDR Trust Series 1 (symbol: MDY). You can download the 98 KB PDF file or open the PDF Document in a new window. The actual CMO graph has a title page and a CMO graph page. This PDF has a duplicate CMO graph that we’ve annotated for educational purposes as the third page.

QQQQ is a unit investment trust designed to generally correspond to the performance of the Nasdaq-100 index before any expenses. It is classified by Morningstar as a large-growth. (For more on Morningstar ...). Sometimes this issue is known simply as “The Qs”.

MDY is a unit investment trust designed to generally correspond to the performance of the Standard & Poors MidCap 400 Index before any expenses. It is classified by Morningstar as a medium-blend. (For more on Morningstar ...). “SPDR” is pronounced “spider”.

We’re not recommending QQQQ, MDY or any other issue mentioned in this section. We are just using them as examples.

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THE TITLE PAGE

Displays the date and numerical value of the ACA as well as the formulation of how the ACA is computed. More information about the ACA is below. The interpretation of positive and negative developments is also shown on the title page.

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THE CMO GRAPH

This is a performance graph of the ACA and the subscriber selected issue or issues for comparison.

What is a performance graph?

Given that issues trade at different prices you can’t directly compare price history from one issue to another. Consider two issues each measured at the same two points in time.

Issue	Was	Is
AAA	$20	$22
BBB	$80	$84

BBB gained $4. AAA gained $2. Is BBB the “better” performer? Relative performance is generally measured in percentage gains or losses. So

Issue	Was	Is	% Gain (Loss)
AAA	$20	$22	10%
BBB	$80	$84	5%

So, for these two issues, over this period of time, AAA would generally be considered the better performer.

Performance graphs reflect percent changes over time. All elements to be compared start at zero percent at the start of the comparison. At the far right side is where those elements are at the end of the comparison.

You can’t use Current Price / Initial Price because that is bounded at the lower end by zero and can’t show negative percentages so the formula for determining percent gain or loss is (Current Price – Initial Price ) / Initial Price.

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What is ACA?

ACA is the acronym for All CPD Actives%. “All Actives” refers to all active issues under evaluation. (For why an issue would be inactive . . .).

We total all the cumulative positive developments (CPD) for those active issues then divide by seven times the number of active issues and express that as a percentage. Why seven? That is the number of TAI we are tracking.

The TOTAL of all CPDs for all active issues
ACA = - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - x 100
7 * the number of active issues

So, if the total number of active issues was 1,000, and the total number of CPD for those issues was 400, then, for that day ACA would be 40%.

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Positive Developments (PD) and Negative Developments (ND)

A positive development (PD foretelling a rise) occurs when
EITHER ACA x+ 40%
OR ACA x+ 50%

A negative development (ND foretelling a decrease) occurs when
EITHER ACA x- 50%
OR ACA x- 40%

The reason for the dual event for both PD and ND is that ACA may drop below 50% (a negative development) then rise above 50% (a positive development) without ever reaching below 40%. ACA could also rise above 40% (a positive development) then drop below 40% (a negative development) without ever reaching 50%.

This indicator can be used as a "negative development" as opposed to "no longer a positive development (NPLD)".

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Interpreting Signals

Looking at the annotated CMO graph you can see vertical blue lines labeled A through G. These mark the recent signals and we’ll discuss each in turn. You’ll also see three red circles labeled W1, W2 and W3. These are whipsaws where the signal changed rapidly.

We’ll use the PD as the signal to
1) close a short position and 2) open a long position

We’ll use ND as the signal to
1) close a long position and 2) open a short position

Generally waiting for the opposing signal can be too late to get out at the best position. By the time the opposing signal appears at least some of the profit is gone. See table 1 below. Be sure and read the section on exits to understand how your risk tolerance affects how you decide to exit a position. Table 2 uses the same entry points, but uses trailing stops and reversal of ACA direction at high or low levels to achieve better gains.

Look now at page three of the PDF, the annotated CMO chart. The 40% level and the 50% level are highlighted by dashed blue lines to make them easier to spot. Notice that over the entire period covered by the chart both QQQQ and MDY lost value, yet within time frames profit could be made as they rise and fall. We will discuss whipsaws a little later.

A	6/6/06 This is ACA x- 50%, a negative development (ND). It is a signal to go short and is our first position for this example.
B	6/21/06 ACA x+ 40%, a positive development (PD) and a signal to go long. Look at the horizontal blue line between vertical blue lines A and B. Notice that both QQQQ and MDY are lower near B than A. This indicates that both lost value. MDY lost more than QQQQ. Why would we be glad about this? Because at A we went short and made a profit when the price declined. For the purposes of this explanation we are using the opposing signal to close the position. So our short position was initiated at A and closed at B. Look carefully at the purple line for QQQQ and the black line for MDY. Notice they both were lowest long before the vertical blue line B.
C	7/12/06 ACA x- 50%, ND, go short Because we’re using opposing signals to close the earlier position at line C we close the long position initiated at line B and lost about 5% on shorting QQQQ. MDY would have gained a bit. Notice again that both had higher values before C. A trailing stop loss might have kept those gains in your pocket. Looking at Table 2 we can see that this approach would have materially reduced the loss. We also initiate (also called opening) a short position.
D	7/24/06 ACA x+ 40%, PD, go long First we close the short position opened at C. Notice that both QQQQ and MDY declined from C to D indicating a profitable short trade. Now we open a long position at D.
E	8/8/06 ACA x- 50%, ND, go short First we close the long position opened at D. Both QQQQ and MDY are higher than when we opened the long position at D. Notice that again both had higher values before E. Trailing stops might have kept those higher gains in your pocket.
F	8/14/06 ACA x+ 40%, PD, go long After the close on Friday 8/11/06 ACA was at 39.16. You would have a hard time reading this from the graph, but the numerical value of ACA would have been on the title page after the market closed 8/11/06. ACA x- 40% is a negative development and we are already short so we stay short. After the close on Monday 8/14/06 ACA was 42.53 and had crossed over 40% for a positive development. We close the short position opened at E for a small loss in QQQQ and small gain in MDY. In this case the gains and losses for the trade opened at E are the same in Table 1 and Table 2.
G	9/7/06 ACA x- 50%, ND, go short First, close the long positions opened at F. Both QQQQ and MDY had nice gains, but again, both had higher gains before G. Watch your exits.

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Table 1 Using Only Opposing Signals to Open and Close Positions
Signal Point	Date	Action	QQQQ Price at Open Next Day	Gain (loss) %	MDY Price at Open Next Day	Gain (loss) %
A, ND	6/06/06	Open Short Position	38.80		138.60
B, PD	6/21/06	Close Short Position	38.59	0.54%	134.46	2.99%
B, PD	6/21/06	Open Long Position	38.59		134.46
C, ND	7/12/06	Close Long Position	36.64	-5.05%	135.48	0.76%
C, ND	7/12/06	Open Short Position	36.64		135.48
D, PD	7/24/06	Close Short Position	36.49	0.41%	133.02	1.82%
D, PD	7/24/06	Open Long Position	36.49		133.02
E, ND	8/08/06	Close Long Position	36.99	1.37%	134.49	1.11%
E, ND	8/08/06	Open Short Position	36.99		134.49
F, PD	8/14/06	Close Short Position	37.20	-0.57%	133.83	0.49%
F, PD	8/14/06	Open Long Position	37.20		133.83
G, ND	9/07/06	Close Long Position	38.54	3.60%	135.23	1.05%

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Table 2 Using Signals to Open Positions and Trailing Stops/Reversal of Direction to Close Positions
Signal Point	Date	Action	QQQQ Price	Gain (loss) %	MDY Price	Gain (loss) %
A, ND	6/06/06	Open Short Position @ 6/7 open	38.80		138.60
	6/14/06	Reversal of ACA direction
	6/15/06	Close Short Position @ 6/15 open	37.85	2.45%	132.54	4.37%
B, PD	6/21/06	Open Long Position @ 6/22 open	38.59		134.46
	7/03/06	ACA x+ 70%, tighten stops
	7/05/06	Reversal of ACA direction at high level
	7/06/06	Close Long Position @ 7/6 open	38.27	-0.83%	136.07	1.20%
C, ND	7/12/06	Open Short Position @ 7/13 Open	36.64		135.48
	7/17/06	ACA x- 25%, tighten stops
	7/18/06	Reversal of ACA direction at low level
	7/19/06	Close Short Position @ 7/19 Open	36.12	1.42%	131.97	2.59%
D, PD	7/24/06	Open Long Position	36.49		133.02
	7/28/06	ACA = 61.18
	7/31/06	ACA = 60.50
	7/31/06	Reversal of ACA direction at high level
	8/01/06	Close Long Position @ 8/1 Open	36.77	0.77%	134.88	1.40%
OR D, PD	7/24/06	Open Long Position	36.49		133.02
	7/28/06	ACA = 61.18
	7/31/06	ACA = 60.50
	7/31/06	Reversal of ACA direction at high level
	8/01/06	ACA = 54.92, still over 50, stay in
	8/02/06	ACA = 60.68
	8/03/06	ACA = 61.47
	8/04/06	ACA = 60.28
	8/04/06	Reversal of ACA direction at high level
	8/07/06	Close Long Position @ 8/7 Open	36.91	1.15%	135.61	1.95%
E, ND	8/08/06	Open Short Position	36.99		134.49
	8/09/06	ACA = 45.45
	8/10/06	ACA = 45.57
	8/11/06	ACA = 39.16
	8/14/06	ACA = 42.53
	8/14/06	ACA x+ 40%, a PD
	8/15/06	Close Short Position @ 8/15 Open	37.20	-0.57%	133.83	0.49%
F, PD	8/14/06	Open Long Position	37.20		133.83
	8/18/06	ACA = 65.14
	8/21/06	ACA = 61.83
	8/21/06	Reversal of ACA direction at high level
	8/21/06	Tighten stops
		ACA declines, but never below 50
	9/05/06	ACA = 70.05, high level
	9/06/06	Close Long Position @ 9/6 Open	39.08	5.05%	137.56	2.79%
OR F, PD	8/14/06	Open Long Position	37.20		133.83
	9/05/06	ACA = 70.05, high level
	9/06/06	ACA = 55.27
	9/06/06	Reversal of ACA direction at high level
	9/07/06	Close Long Position @ 9/7 Open	38.57	3.68%	135.38	1.16%
G, ND	9/07/06	Open Short Position	38.54		135.23

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NOTES ON ENTERING AND EXITING

Entering at a non-signal point carries considerable additional risk. If you get out of a position before an opposing signal, don’t re-enter the market until the next signal. For example: had you exited in early July 2006, as both QQQQ and MDY declined after the peak on July 3, 2006, you would stay out of the market (neither long nor short) until the next signal at vertical blue line C.

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NOTES ON LEVERAGED FUNDS

Sometimes called margin, leverage is the use of borrowed funds to increase your gain. For example: If you purchase 100 shares of ABC at $40 per share you pay $4,000 (not counting commissions or fees). If ABC rises and you sell at $50 per share you gain $1,000 or a 25% ($1,000 / $4,000) gain.

Instead you borrow $4,000, add your own $4,000, buy 200 shares at $40/share, then sell at $50/share. Say this takes a month and the cost of borrowing is 1% per month. The total amount realized from the sale of 200 shares at $50/share is $10,000. You have to give back the borrowed $4,000 and $40 in interest. This leaves you with a net gain of $1,960 ($2,000 less $40 interest) or 49% ($1,960 / $4,000) gain, almost double the gain of the non-leveraged investment.

A leveraged fund does the same, but transparently to you. For example: ProShares QQQ Ultra (symbol: QLD) has as its objective double the NASDAQ-100 Index. QQQQ has as its objective to track the same index. If both QLD and QQQQ are successful then for every dollar QQQQ goes up QLD should go up two dollars. The inverse is also true, if QQQQ goes down, QLD goes down more.

The use of leverage increases risk.

Your risk tolerance might not allow the use of leverage. Monitor your antacid consumption while doing paper trading to see if leverage is for you.

Another advantage of a leveraged fund is it may allow the use of leverage in accounts (such as IRAs) that don’t allow the use of margin.

Remember: We’re not recommending QQQQ, MDY, QLD or any other issue mentioned in this section. We are just using them as examples.

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NOTES ON INVERSE FUNDS

An inverse fund has as its objective to achieve the opposite of something else. For example: ProShare Short QQQ (symbol: PSQ) has as its objective the inverse of the NASDAQ-100 Index. QQQQ has as its objective to track the same index. If both PSQ and QQQQ are successful then for every dollar QQQQ goes up PSQ should go down one dollar. The inverse is also true, if QQQQ goes down PSQ goes up. Investing in an inverse fund generally allows you to short in accounts (such as IRAs) that don’t allow shorting.

There are also leveraged inverse funds such as ProShare QQQ UltraShort (symbol:QID).

Remember:

The use of leverage increases risk.

The use of leverage increases risk

Remember too: We’re not recommending QQQQ, MDY, QLD, PSQ, QID or any other issue mentioned in this section. We are just using them as examples.

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NOTES ON WHIPSAWS

The bane of technical analysis a whipsaw is a signal quickly countermanded by another signal. The CMO is not immune to whipsaws, there were three of them in the example PDF. The whipsaw effect can be reduced by waiting a day for confirmation of the change of signal. Or, if you are already in a position then rely more on trailing stops for your exit strategy. What gets you into a trade (the CMO signal) might not be the best (most profitable) way to get out of it.

[Top] [Sample CMO]