How is the stock rating calculated?
Each factor starts with a raw value which is normalized for consistency across different types of stocks, then given a 1-100 score reflecting its relative rank within the comparison universe (either the Russell 3000 or the stock’s Industry Group). Factors have been selected for their predictive value and lack of covariance.
Factors are combined with a proprietary weighting system into a raw rating, which is adjusted for strongly trending stocks to arrive at a final Power Gauge Rating.
Note. Factors in the Earnings and Experts Components are based on data from S&P Compustat. Earnings and Estimate values displayed in the Chaikin Analytics application are sourced from S&P.
The Raw Power Gauge Stock Rating
Factors are combined with a proprietary weighting system into a score which is ranked across the Russell 3000. This ranking is turned into a “raw” rating by dividing the universe into 7 equal parts, or “septiles” and assigning into “rating buckets” as follows:
This rating indicates a stock’s likely performance relative to the Russell 3000 over an intermediate time frame (1-6 months). Independent backtesting has confirmed the correlation between the Power Gauge Rating and relative performance at 1, 3, and 6 month intervals, in real-world performance as well as during test periods with known data.
Distribution of Ratings
Raw Power Gauge Ratings for Russell 3000 stocks have a consistent distribution at any given time.
The process is run separately on the broader 5,000 stock universe to determine Power Gauge Ratings for approximately 2,000 small cap stocks not in the Russell 3000. This is done so the very small cap stocks do not distort the rankings of the Russell 3000 stocks.
How does the TECHNICAL OVERLAY work?
As a final step, the raw Rating may be adjusted to account for strongly trending stocks by applying a “technical overlay“, which can clip the Rating to “Neutral+” or “Neutral-“.
If a Very Bullish or Bullish stock closes below its long-term trend (the 200-day double-exponential average, or orange line on the Chaikin chart), the Power Gauge Rating will be clipped to Neutral+. The Bullish rating will be restored once the stock closes back above this line, assuming the raw Rating remains Bullish.
Conversely, If a Very Bearish or Bearish stock crosses above its long-term trend, the Power Gauge Rating will be clipped to Neutral-. The Bearish rating will be restored once the stock closes back below this line, assuming the raw Rating remains Bearish.
The overlay is applied when the raw Rating does not agree with the actual technical condition of the stock, as this indicates there may be some information driving the market which the model has not factored in yet.
When a Bullish Stock crosses below its long-term trend, it is at higher risk for a breakdown. By clipping to Neutral +, this is like applying a circuit breaker – it lowers the risk of the model, and reduces volatility in your returns if you are following the model, until price activity agrees with the Rating again, when the confidence level of the Rating is higher.
This allows the Chaikin Power Gauge model to respond to overall market trends: at times when many stocks are breaking down, the overall distribution of ratings will skew Bearish, and in times when many stocks are breaking out, rating distribution will Bullish.
Exception. A Bearish stock which closes above its long-term trend will remain Bearish if DEMA is falling.