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I have always enjoyed the intellectual challenge of the markets at least as much as the financial rewards that getting it right can offer. Of course, a decent profit or a handsome commission (do they still exist?) as reward for generating a decent idea and getting the timing right, are not to be sniffed at.

Getting a Buzz

However, in my own case, the buzz I get from having โ€œbeaten the marketโ€ when an idea comes to fruition is hard to top. If you're lucky in these circumstances one of your peers may take the time to say 'good call', which is the cherry on top.

Being largely independent gives me the latitude and time to experiment. I am not pigeon-holed and if I have met my publishing deadlines - then my time is largely my own which is a great privilege.

Eating what you kill has its downside of course but having a certain amount of 'free time' is a benefit. I can literally start every day with a blank page.

In fact, there are a series of blank pages for me to populate throughout the day. Some real, some metaphorical.

The blank spaces I enjoy the most are those on my trading blotter. When I start to fill those in it's because I am working on an idea, a kernel of thought, something that can become the basis for some research or experimentation.

If you've been reading my articles and posts lately you'll know that I've been running with several experiments and theses, that for the most part, have come good.

For example just over a fortnight ago (on Valentine's day) I proposed the idea of using Anchored VWAPs as a measure of fair value (and they say that romance is dead).

I used the Nasdaq 100 March 23 Emini contract as my testbed. See Adapt. Anchor. Profit? and posted the chart below ๐Ÿ‘‡

The three lines clustered together all represented anchored VWAP's, and as part of the experiment I made the case that the market could be getting ahead of itself ๐Ÿ‘‡

Now at the moment, I don't have the empirical data to prove that the Nasdaq is getting ahead of itself, and is potentially in line for a significant correction.
Even if I did have that data, this could be the time when instead of correcting or reverting to the mean, the index continues to move further away from the anchored VWAP levels.
However, that isn't what my intuition is telling me.

Take a look at the updated chart and on the basis of this evidence, I think we could legitimately claim it as a success. ๐Ÿ‘‡

By my reckoning, there were around 900 index points up for grabs between the two iterations of charts. Each full point is worth $20.

Who, what, when, where, why

Why did I start looking into the use of Anchored VWAPs? Well, one of my platform providers started to offer the indicator in the charting package.

That struck a chord with me. Back when I was sales trading equity long short ideas to hedge funds, a decade and more ago, I built myself some snazzy Excel sheets and one of the indicators that I used to track religiously was VWAP.

Inspiration can come in many forms.

For example, last week I saw this chart as part of a compendium of macro-related equity charts and data published by UBS. ๐Ÿ‘‡

Source: UBS Research

I couldn't get the chart and its implications out of my head.

Growth stocks with good free cash flow were cheap or had underperformed the S&P 500.

And so on Thursday, I decided to investigate further. I created a screen looking for large and mega-cap US companies, that had enjoyed good historic sales and cash flow growth over the mid-term.

Having generated that list, I enriched it with some additional qualitative data, in particular data about the momentum and price performance of the list constituents, which ran to around 150 names.

The next step was to create a visualisation of the data like the one below:

Viewing the data like this allows you to see it in context, and to quickly make comparisons between items. You can highlight or screen out obvious outliers, and by adding filters to the datasheet, you can drill down into the group and isolate items of interest.

I picked on Twilio (TWLO) because it had a good combination of new three-month highs and positive cash flow growth over the last three years. Which said to me that it had the potential to move higher on the basis of the UBS chart above.

Speaking of charts, the price chart for Twilio just after the open yesterday, was one that only a mother could love.

But that appealed to me too, because as you can see there was plenty of upside potential. Indeed it traded up by as much as+9.0% in Thursday's session.

Then by another 3%+ in Friday's session.

So where am I going with this?

I want to make two observations:

The ideas above were generated using free or relatively inexpensive resources. You don't have to spend thousands on high-end systems to generate what I would regard as Alpha.

Of course, if you are doing this as a professional and someone else is picking up the tab then fine, although inevitably it's fed back into your cost base.

I try to keep my annual data costs in the low 4-digit range. Optimising your costs means more money in your pocket at the end of the day.

Secondly, the reason I was able to make these calls was that I was inspired by something that I read or saw, which made me curious to know more. You may have heard me say this before but read widely and be open to new ideas.

One of the best clients I ever had, a portfolio manager at what was then one of the world's biggest hedge funds, told me it wasn't his job to turn away new thinking or new ideas. Instead, his role was to decide if those new ideas could add value to his process.

He asked me to impress him with an idea, and I duly complied and a little later I got a ยฃ2.5 million order for my troubles.

These days I like the fact that I can generate good ideas from my garden office (shed) which of my chums wittily described as โ€œGoldman Shacksโ€ proving that it's not where you are but what you know that counts...