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|An Introduction to Group Power by John Bollinger, CFA, CMT
The late 1970s saw the arrival of the first major computerized technical analysis platform; called Merlin, it ran on a large main-frame computer. One feature of Merlin was a weekly table of the S&P industry groups ranked by their deviations from a moving average. The table displayed eight weeks of ranks, so one could see the developing trends and as soon as I saw it, it became an important part of my analysis. Merlin ultimately lost its corporate sponsorship and was shutdown, so I created Group Power to replace Merlin's group analytics. Initially it was a table similar to the Merlin table, but as I realized its potential Group Power quickly assumed a life of its own. The first real change was a switch to our own equal-weighted industry groups. The momentum calculations were revised next and when the Internet became a reality Group Power morphed into an interactive Web application that has continued to improve steadily.
The philosophy behind Group Power is much like the philosophy behind team rowing. Consider a four person scull. Four people must row together in order for the boat to progress across the water. If one ships their oar the boat will skew wildly to the side; if another rower on the other side ships their oar, the boat will straighten out but it will proceed only at a greatly reduced pace; if the rowers row in an uncoordinated manner, all that will result is a lot of churning. So it is with the stock market: The scull is the portfolio, the investor is the coxswain and the rowers are the stock, the industry group, the market sector and the market. In order for the greatest profits to be made all four rowers must pull together. The ideal is a strong stock, in a strong group, in a strong sector, in a strong market, or, for shorts, the reverse. We tend to place equal weight on each of the factors, 25% stock, 25% group, 25% sector and 25% market, but those weights can be easily tilted to suit your personal preferences and style.
The Group Power industry groups are equal-weighted, which allows the maximum amount of information to flow through the structure. This is a very important concept. Virtually all other industry groupings are capitalization weighted, which is an important consideration for institutional investors, who must be able to invest in massive size. However, for informational purposes and individual investors equal weighting is vastly superior. As far as we know, Group Power is the only source of equal-weighted industry groups available to the individual investor.
I tend to like stocks in groups that have been in the lower half of the list and are now rotating up through the rankings. One way of approaching that idea is groups that are in the second quartile where the short-term rank is greater than the intermediate-term rank, which in turn is greater than the long-term rank. Another technique I have employed for years is to scan across the ranks and note the trends, especially where the ranks were stable for a period and are now increasing or decreasing. One thing to avoid is groups that have been in the upper reaches of the list for too long as they tend to be tired and vulnerable. Then there is the market timing info that Group Power generates. For example, the percentage of groups over their 10-, 50-, and 200-day averages are excellent indications of overbought / oversold and terrific market-timing tools.
There you have it, a bit of the history and philosophy of Group Power and some pointers on how I use it. Group Power's analytical power runs deep, so give it some time, dig in and study what's here; when you do, you will be richly rewarded. I am sure that you will find that once you have invested with Group Power you can't invest without it.