Archive for April, 2011|Monthly archive page


In dow theory, ETF on April 20, 2011 at 4:14 pm

As the NHL hockey playoffs progress, I am reminded of how similar our AlphaDow investment ranking system is to ranking hockey teams.  The Vancouver Canucks clinched the “President’s Trophy” as the best team in the NHL for the year.  They did this on the last day of March, before any other team in the Western Conference even clinched a playoff berth.  What does that mean?  As potential MVP Daniel Sedin so eloquently put it, “it means we played pretty good”.

The Canucks take their #1 ranking into the playoffs which means they get home ice advantage in every round.  Again in the words of Sedin “it doesn’t mean we are guaranteed to win it all, it just means we have a pretty good chance”.  As I read that quote I was inspired me to write this missive.  Allow me to explain:

A lot goes into making a championship team.  It takes strength throughout the organization, from senior management right down to the trainers.  Talent and skill are a given, team chemistry, hard work and perseverance are all a part of crafting a team that is ready to win Lord Stanley’s Cup.  Good coaching and strong drafting go into creating a championship contender.  Sometimes it can take years to bear fruit.

Right now, the top three teams in the Western Conference are:

1.  Vancouver Canucks
2.  San Jose Sharks
3.  Detroit Red Wings

And in the Eastern Conference:

1.  Philadelphia Flyers
2.  Washington Capitals
3.  Boston Bruins

If you had to pick six teams that could potentially win the Stanley Cup, you could do worse than to pick these six.

The same thing can be said for the investment world.  The economic conditions have to be right, management has to make good decisions, strategic acquisitions, hire top talent and execute their business plans.  Just like the NHL, it can take years for the conditions to be “just right”.

Right now the top six “teams” in the Canadian stock marketplace right now are:

1.  Materials
2.  Small Caps
3.  Real Estate Investment Trusts (REITs)

4.  Mid Caps
5.  Energy
6.  Technology

You could do very well by investing 5% of your portfolio in each of these six “teams”.  The good news is that there is an exchange traded fund (ETF) that tracks each one of these categories, and they are simple to buy.

To take this analogy a step further, assume that you bet on each of the top six teams to win the cup, but two of the teams end up losing in the first round of the playoffs (hopefully not the Canucks).  What do you do now?  You still have a chance of having the Cup winner in your remaining four picks.  Why not re-rank the remaining teams and “fill-in” your picks with the highest ranked teams remaining.  This means you would have two new picks for the second round of playoffs to go with your original four remaining picks.  Again, your odds of picking the Stanley Cup winner are not 100%, but they remain pretty good.

We do the same thing in the investment world by “rotating up” into the strongest sectors if one of our investments gets “knocked out” by declining prices.  We simply re-rank the sectors that are not already in our portfolio and spread our remaining capital amongst the strongest areas.  This ensures that we always have our capital working for us in the strongest areas.

Of course, when we invest in stocks, just like hockey, we are not guaranteed of anything.  History is rife with stories of major upsets, like the Philadelphia Flyers as recently as last year, getting into the playoffs on the last day of the regular season and making it all the way to the Stanley Cup Finals.  That said, by spreading our investment dollars around on the strongest performing sectors and stocks, we have a “pretty good chance” of picking a few winners.

As always, if you have any questions on how this relates to your portfolio, please don’t hesitate to contact me at