Henning, The Value and Momentum Trader

Reading Grant Henning’s The Value and Momentum Trader: Dynamic Stock Selection Models to Beat the Market (Wiley, 2010) is like wandering through a botanical garden if you are a plant lover. You adopt a leisurely pace because there are so many things to look at. Most are familiar, but even among them there are some you want to examine more closely.

Henning considers himself a pragmatist, where “pragmatism can lead to appropriate solutions without the distractions of rigorous theoretical accommodation.” (p. 4) A trader doesn’t need to know why a particular trading system works well for him; as long as it works, the search is over. Henning set his own personal bar high: to develop a trading system that would generate earnings in excess of 10% per month. He created his trading profile over time. He would trade only stocks, he would be a swing trader holding positions for anywhere between three days and three months, he would use margin when conditions were extraordinarily favorable, and he would be a long-only trader in bull markets and either be out of the market entirely or be invested in short index funds when the market was “unfavorable.”

The two major tasks facing Henning were to develop a stock screen and to find a way to measure market conditions. He offers the reader the fruits of his labor. First, ideas for creating a hybrid screen that combines fundamental and technical parameters. Fundamental data are used to identify stock value; technical data are timing devices that highlight price momentum. The initial process is rather time-consuming, but once set up it spits out weighted buy and sell recommendations daily with only about an hour’s worth of work each evening.

The momentum screen in and of itself will serve as a barometer of market conditions. For instance, in a weak market few stocks are near their 52-week highs. Henning also considers the VIX and the put/call ratio to be reliable timing indicators.

Henning’s trading is labor intensive, not designed for the weekend warrior. Screening for potential buy candidates is only the first step. He then monitors these stocks pre-market, seeking out intel. Once the market opens he watches price action and decides whether to enter and, if so, the best entry point and best order method (limit or market). He culls out losers in his portfolio and determines when to take profits on winners. He manages his portfolio both in terms of diversification and proportionality of holdings. And, of course, he keeps records.

Both Henning’s stock screen and his overall trading methodology are hybrids. The screen uses fundamental as well as technical inputs. The methodology combines systematic and discretionary elements. Hybridism is, it seems, Henning’s pragmatic solution. And, unlike Toyota, he doesn’t have to worry about a runaway acceleration in trading revenues.