The Amazing Stock Bee

In a previous post, I mentioned one blog (and so far the only one I can recall) that actually resulted in $$$ in my pocket. That blog is the excellent Stock Bee run by Pradeep Bonde aka EasyGuru. If memory serves me correct, EasyGuru originally started out as a marketing/advertising consultant in India and also taught MBA level courses in marketing. At some point he took his earnings and began researching methods of speculating in financial markets.

His methodology is an interesting mix of event-driven, momentum, relative strength, and technical analysis. It is based on the works of Investors Business Daily, Dan Zanger, while its core is based on academic research first published by  R. Ball & P. Brown, ‘An empirical evaluation of accounting income numbers’, Journal of Accounting Research, Autumn 1968, pp. 159-178.

The strategy invests in securities with fundamental catalysts and specifically those reporting positive earnings/revenues surprises compared to consensus estimates and/or combined with increasing forecast guidance. StockBee then filters these securities looking for specific technical patterns which usually incorporate opening gaps, volume driven break-outs, and buying new highs. It is a long-only strategy designed to capture the impending momentum of those securities with specific catalysts.

Does it work? My first position was on a proprietary trading desk assisting with a long/short portfolio. I introduced this strategy and it quickly became the lead strategy for our book. We became involved in long term trends in explosive stocks, RIMM, GOOG, BIDU, CROX, BWA, to name a few names that experienced 20%,50%,100%+ moves. True, names like CROX and BWA came back to earth but this methodology helped us identify those multi-year high growth names with enough time to capture a large chunk of the move. Following a strategy like this is the way to find that next MSFT or GOOG. The year was 2007 & 2008 and we were minting money, making double digit returns in single months.

The important to understand was the source of edge. Momentum is caused by herding and an under-reaction to fundamental news in the case of earnings reports. Combined with a low float, prices and investor irrationality can cause a stock to move well beyond its ‘true’ value. Stockbee takes this same concept and applies it to neglected stocks, IPOs, and high relative strength stocks.

The relative performance of a stock to an index is known as its ‘beta’ and these stocks had extremely large betas, moving significantly higher in up markets but susceptible to sharp double digit pullbacks on market corrections.  Being on a proprietary trading desk, we were confined to daily loss limits which did not really suit a long/short growth focused portfolio. In order to protect our book against these sell-offs we hedged our long stock portfolio with short delta option positions in corresponding indices, usually Russell 200o or the Nasdaq. We utilized split strike synthetics, calendar spreads, ratios depending on the market conditions. But as said above, the large beta did not always make our hedges effective, we were forced to actively manage our stops and in essence to time the overall market.

When market timing, or taking any directional risk, you are at the mercy of ‘the equation’; A function that combines expectancy and frequency. So in many cases we were trading ‘leverage beta’ with dynamic risk management in terms of stop loss management and market timing skill. If we messed up, we could suffer significant losses on our long positions. Despite the amount of edge inherent in this strategy, risk management was the difference between profit and loss. Unfortunately many of the potential securities did not have listed options.

When trading a strategy it is more important to understand how and why your edge exists, to learn from experience when it works and when it doesn’t. That is why some traders can make money off general technical indicators where most fail. Most novices are looking for that Holy Grail whether they themselves know it. Stockbee presents an extremely powerful edge but it is up to the reader to fully dissect the strategy, read all the material, review charts, and most importantly trade the strategy till they own it.

This post is my interpretation of his trading style and methodology and I emphasis that this is MY interpretation. I encourage any readers to check out the content of his site and follow his trading methodology for awhile till the ‘light-bulb” moment occurs.

~ by largecaptrader on October 26, 2009.

2 Responses to “The Amazing Stock Bee”

  1. Hi LargeCapTrader,

    Could you write a post about the tools you have used in your trading career? i.e. matlab (with what data feed?), trading platforms, etc. Any info on what the pro’s use or opinions would be great.

    Keep up the great work!

  2. […] have started subscription or premium based services to share trading ideas. I wrote about one such site which has become quite a popular post on this blog. Some random thoughts on this trend and a few […]

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