- Proprietary Features
- Overall Utility
In this review, we look at market timing and analytics software VectorVest. With a rich history dating back to the late 1970s, does the platform stand up today?
VectorVest is stock market analytics software developed to simplify the decision-making process for individual investors. The software dates back as far as 1978 when Bart DiLiddo, PhD started developing mathematical models to time the stock market, as well as rank stocks. The software aims to give individual investors access to quantitative analytics at a retail price.
Who is Bart DiLiddo?
Bart is the founder of VectorVest. He is a mathematician with a PhD from Case Western University, graduated from MIT, and was formerly a president at Goodrich. VectorVest launched as a weekly issued book of stock rankings in the 1980s and DiLiddo has been developing the system ever since.
VectorVest separates their membership tiers by how up-to-date your data is. Considering that this tool is more targeted at investors and positional traders, I don’t see how intraday or real-time data adds enough value to justify the price jumps. This pricing strategy would be more appropriate for a day trading scanner, however, one can argue that shorter term traders will find value in real-time updates of the market timing tools.
The VectorVest platform is based on a few core indicators. Those are:
- Value: Quantitative measure of a stock’s actual value based on discounted cash flows, earnings, profitability, and future guidance.
- Relative Value: Long term price appreciation potential compared to AAA corporate bonds.
- Relative Safety: Risk indicator. Looks at consistency and predictability of a company’s financials.
- Relative Timing: VectorVest’s proprietary trend identification indicator.
- Direction (direction of move)
- Magnitude (size of move)
- Dynamics (speed of move)
- VST (Value, Safety, and Timing): A weighted average of VectorVest’s Value, Safety, and Timing indicators.
Market Timing Tools
One of the core features of VectorVest is their market timing tools. They claim, that based on their proprietary market indicators, they can send out reliable buy/sell signals. Their headlining tool is the color guard.
The color guard is VectorVest’s main market timing indicator. It is expressed as a simple semi-circle graph with a pointer indicating the algorithm’s reading of the current market trend or direction.
The color guard looks at three market indicators to produce it’s reading
- Price movement of VectorVest Composite Index
- Relative Timing
- Buy-to-Sell Ratio: Looks at the health of the overall market
Market Timing Graph
In addition to the Color Guard, VectorVest includes their proprietary indicators as technical analysis studies, allowing traders to develop their own setups based upon them. As you can see, the chart is currently bullish, as all three indicators have recently crossed above the zero line.
The VectorVest scanner is mostly based on their indicators, however, they do have various technical and fundamental indicators included if you’re looking to add specific criteria to your scans, but this would not be my scanner of choice for such a task. if you’re looking to build a watchlist based on broad criteria, this would be my scanner of choice.
Let’s say, for example, we already have a long portfolio of stocks that we’re happy with and want to start a short portfolio to hedge against market drops. We’re going to stick to a few basic metrics like VectorVest’s VST (Value, Safety, Timing), their buy/sell recommendations, and the relative safety indicator.
We’re going to filter for stocks that have a sell rating issued by VectorVest, a VST level below 0.5 (scale goes from 0 to 2), and a Relative Safety level below 0.5. The reason we include Relative Safety in addition the the VST indicator (which already has a safety filter built in) is because we want to overweight towards stocks that have unstable financials and operations, as those make excellent short candidates.
As you can see we get a list of several stocks with very poor price movement, fundamentals, and stability. We now have a short list that we can research and make trades upon.
VectorVest has a built-in tool for backtesting trading strategies. The tool is quite similar to most retail backtesting packages like those of Money.Net or TradingView.com, however they do have some of their own unique features that capitalize off of the VectorVest platform.
When developing a new trading system, the backtester asks if you’d like to add any of their proprietary market timing filters. So, instead of choosing stocks from a large watchlist like the S&P 500 or the tech sector, it will only trade stocks that make it through their market timing system. In this example we choose to use the market timing filter, and use their Confirmed Calls system.
From there, it mirrors most other retail backtesting software. You choose a set of criteria from your saved scans list, set stop loss criteria, short selling criteria, and your criteria for when you go to cash.
Here is a sample backtest I did, starting the portfolio in 2009.
Like most similar services, VectorVest has model portfolios based on their indicators and trading principles as an example of what successful implementation of their system looks like.
Known as “Watchdogs,” the VectorVest alert system sends you desktop alerts based on criteria you feed it. Criteria like support/resistance levels, and MACD crossovers are possible with these alerts.
VectorVest’s target demographic is working professionals with lots of savings, and retirement investors. VectorVest caters to self-directed investors, but is slightly more complex than services like Motley Fool and Jim Cramer’s Action Alerts Plus. This market is pandered to by so many newsletters, services, systems, and the like. Most of the offerings don’t add enough value to these investors to justify them straying from index investing.
VectorVest’s value-adds are time and intelligence. Any service can offer you dozens of data points, but most of VectorVest’s target customers have no interest in creating sophisticated systems or trying to analyze a bunch of data. They want a simple way to find good companies, do a bit more research on them, and make sure they don’t buy a falling knife. VectorVest does all of this in a short period of time with their stock picking algorithms.
I’m not saying you should start a hedge fund based on VectorVest’s signals, but to me, it’s probably the best way for the indexing-skeptical casual investor to build a portfolio of fundamentally sound companies that are moving in the right direction.