The Program For Trading Like A Hedge Fund

Feeling disenchanted following the 2008 financial collapse, a large bulk of traders and investors moved their money out of managed funds and brokerages to self-directed investments. As that tide of money receded from money managers, Marc Chaikin, a trader, broker and analyst with over 30 years of market experience, identified an opportunity to help those individual investors effectively manage their money using the same methods as those used by the big brokerage firms. That is when he started Chaikin Analytics.

Chaikin visited Benzinga's PreMarket Prep morning show on Wednesday to talk about the genesis of Chaikin Analytics as well as the factors and developments that have made the application a success for everyone from hedge fund managers, like John Paulson and George Soros, to retirees managing their 401(k)s.

The Chaikin Power Gauge

One of the essential components of Chaikin Analytics' success has been the Chaikin Power Gauge, a 20-factor alpha model that determines a stock's long- and short-side potential over a three- to six-month period.

On the show, Chaikin elaborated on some of the quantitative aspects that underlie the gauge's success in forecasting a stock.

"We break them down into four components," Chaikin began. "The financial metrics are value metrics that a Warren Buffett would look at, and there the two key metrics are free cash flow and price to sale. Then we look at earnings because earnings are critical, in that component earnings surprise is very important." Chaikin emphasized that, on the eve of earnings season, the pattern of these reports from quarter to quarter can persist, and the gauge allows investors to understand these earnings trends through back-tested and real time data.

Chaikin continued explaining the elemental makeup of the Power Gauge and how each metric is equally weighted to provide an eclectic model of a stock's potential performance, saying, "We also look at sentiment type indicators, whether the insiders are buying, what the shorts are doing. Finally, we look at whether the analysts are raising or lowering their estimates and whether they're changing their opinions about a stock. Only about 15 percent of the model is technical, 85 percent fundamental, and we do this for 5,000 U.S. equities and we update it nightly."

Technical Supplements

In addition to the Chaikin Power Gauge, the program also offers additional tools to help refine the information and guidance offered by the gauge such as technical indicators and a stock screener. "We encourage people to combine [the gauge] with two technical indicators," said Chaikin. "Chaikin Money Flow measures institutional buying and selling and relative strength is a reality check. Because no matter how good your model is, your fundamental research, if the market doesn't agree with you, at best it's dead money at worst it's a disaster in the making."

When discussing his program's stock screener, Chaikin pointed out that, while it functions similarly to other options in winnowing stocks down by style, market cap and technical indicators, his allows users to screen on quantitative factors that are part of a proven investment model.

Discovering The Right Stock

One of Chaikin Analytics newest additions was added just three weeks prior to Chaikin's appearance on PreMarket Prep. The Stock Discovery Engine offers tailored stock picks based on the qualities of other securities. "The Discovery Engine uses the kind of technology an logic Spotify uses to find music that you like and Netflix, Inc. NFLX uses to find film. You basically seed it with a stock and then it finds similar stocks."

Chaikin provided examples on the versatility of the engine in providing traders a variety of picks to diversify their portfolio or shift their capital away from a falling stock or sector. "If you type JPMorgan Chase & Co. JPM into our stock discovery engine, you're going to get five stocks, typically large-cap banking stocks with similar credentials and similar characteristics to JPMorgan. On the other hand, if you type in a bearish stock like The Coca-Cola Co KO, you're going to find other bearish stocks, typically in the beverage sector, but then you'll also find swaps — stocks that you can use to get out of Coca-Cola if you're unfortunate enough to be in it."

According to Chaikin, the response to the Discovery Engine has been phenomenal, and he emphasized that the tool is offering the same type of curation that Amazon.com, Inc. AMZN and Alphabet Inc GOOG GOOGL provide to their customers.

Parting advice

Before leaving, Chaikin gave some thoughtful advice to Benzinga's audience. He stressed that, when managing their own portfolios, traders need a specific strategy to help determine the potential value of a stock and maximize the efficacy of their trades, and he feels Chaikin Analytics and its various products can provide that.

"That's the most powerful message I can leave with your listeners," Chaikin stated. "You need a disciplined methodology to cut through the clutter and focus on a core group of stocks for your long and short trading, where you have confidence based on some disciplined methodology that you have a directional edge."

Listen to the full discussion with Chaikin at the 35-minute mark in the clip below to hear how Sandy Chaikin rebounded from the 2008 crash using the Chaikin Analytics model.

PreMarket Prep is a daily trading ideas show that focuses on technical analysis and actionable short term trades. You can listen to the show live every morning from 8–9 ET here, or catch the podcast here.

Image Credit: By The original uploader was Jeremy112233 at Wikipedia [CC0], via Wikimedia Commons