How do traders and investors try to reduce the risk of investing? Diversification, asset allocation, position-sizing, and tactical adjustments are all strategies with merit. But for those looking for a straightforward, contemporary way to take on today’s market realities in a measured way, the ROAR score can be an indispensable research aid.
What Is the ROAR Score?
ROAR stands for “reward opportunity and risk,” and I created this methodology based on more than 100,000 hours of professional investing experience. It aims to reduce emotion and zero in on the probability of one of two possible outcomes for any stock or exchange-traded fund (ETF), at any point in time. ROAR promotes higher-confidence investing decisions by attacking a common issue from a unique angle.
It specifically avoids the overused investing strategy in which every decision is turned into a “binary” one. That is, instead of asking “is this stock a buy or a sell,” it simply asks:
“What is the chance that this stock will go up 10% from here, before it goes down 10%?”
This is because investing is more about using a scalpel than a chainsaw. So, why not approach each decision by applying a more surgical yet still easy-to-use grade?
ROAR is not expressed as an either/or choice. Because veteran investors have learned that any stock can go up in price for any reason. However, what often distinguishes the “high percentage shots” from the “long range jump shots” in investing is how much risk of major loss is attached to the pursuit of that potential profit. The “10% up or down” approach employed by ROAR focuses more on what the next consequential change in the stock price will be, instead of setting a deadline or target date.
How the ROAR Score Is Calculated
ROAR has a simple, straightforward mission: Help investors determine which way a stock’s price trend is leaning, and to what extent. ROAR scores are generated by building on existing Barchart technical data and adding a proprietary process that translates into a single percentage figure, updated weekly for any stock or ETF.
This proprietary weighting of several technical elements is based on a combination of price direction, strength, and trend. It seeks to provide what is essentially an automated “chart reader,” created by an investor whose technical analysis experience dates back to when stock charts were produced with graph paper and a pencil.
Over many years of working with Barchart data, I developed my own preferences and biases. While the “off the shelf” information is excellent, my approach to technical analysis is much less “by the book.” I am not a Chartered Market Technician (CMT), though maybe I qualify for an honorary CMT license at this point! I simply have “muscle memory” that has kept me out of trouble for many decades.
I liken this to a “twitch response” that makes someone a good baseball hitter. In the Major Leagues, a hitter has about one-eighth of a second to decide whether to swing at a pitch. While I allow myself more time than that to analyze a chart, when sifting through hundreds of potential investments, my experience has allowed me to quickly filter out the question marks, and focus on a short list. Warren Buffett famously said that he had three trays on his desk: in, out and too tough! My manual chart-reading process is like that too.
But that’s a lot of work. And every time I look in the mirror, I realize I’m not getting any younger. I want to be able to have something to show for the years I put into practicing and perfecting my craft. Something that lives beyond me. But to do that, I needed to streamline the process, and essentially pave the way to remove me from it, gradually, so that others can take my starting point, narrow their own focus using my method, and apply it to their own preferences and biases. That’s ROAR.
So when I really thought hard about all of the data points available on Barchart, I determined that the ones I valued the most were the moving average signal, direction and strength. But since ROAR scores are not about time, but about a set distance a stock price moves, I could not rely solely on one moving average time frame. So I use three different ones: 20-day, 50-day and 150-day. Why? Trial and error.
In particular, Barchart’s characterization of those moving averages, converted to plain language, are one of the keys for me. I look at charts similarly, focusing on the shape of the lines. Again, this is about pattern recognition for me. Less-experienced chartists may not see what I see, and that’s fine. With ROAR, now they don’t have to. They can just get my “final answer” at any point in time, for any stock or ETF.
ROAR also deemphasizes the momentum element that many other stock-grading systems rely on. Momentum is a wonderful thing in investing… when it is positive. But I have found that systems that rely on it are prone to overshooting on both the upside and downside.
ROAR counters that modestly by interpreting the same data with a focus geared toward risk management. Thus, stocks that have just had giant price gains are less likely to generate very high percentage ROAR scores, and those with recent poor performance tend to get marginally higher ROAR scores. I look at multiple time periods and calculate a blended “past performance” of a stock, which is part of the proprietary mix. That figure impacts the ROAR scores as follows: The more a stock has gone up, the less its ROAR score will be, all else being equal. And the opposite is true as well.
If this sounds counterintuitive, you probably like pure momentum strategies. But particularly in modern markets – which I define as 2021 and forward – I find that stock prices do not sustain moves as easily as they used to. The reasons are not critical to me, as price is my guiding principle. But I suspect it has something to do with the impact of algorithmic trading, the increased prominence of hedge funds, and indexation, in which flows into and out of indexes have more influence on stock price movement than ever before. Several studies indicate that the majority of stock exchanges trading volume now comes from “indifferent” investors.
That is, they are buying and selling based on something other than classic fundamentals. Their motivation is to mimic an index or exploit price inefficiencies. Thus, momentum is no longer as reliable a factor as it once was. In fact, it might even be counterintuitive. And that’s essentially what ROAR does that most technical systems don’t.
In the same way that some traders use trailing stop orders, that a stock is automatically less attractive after rising sharply in price, makes sense to me. I’ve seen too many charts that “score well” in mainstream systems. But in reality, there was a strong, urgent move in one direction that was quickly reversed, thereby rendering the system guilty of “chasing” a stock higher or punishing it unjustly when it fell.
Earnings reports each quarter are a major source for this inaccuracy in traditional systems, since these have become “media events” for many companies. I believe that brings a very unnatural set of factors to the temporary determination of price.
How Can Investors Use ROAR Scores?
There is no limit to the use cases for the ROAR approach. However, one straightforward way this method can help investors think more like professional portfolio managers and risk managers is as follows.
The higher the ROAR score, the higher the position size (i.e. “weighting”) within a portfolio. Once an investor gets comfortable with using ROAR scores, they can decide for themselves what score ranges are actionable for them. Some may insist on a ROAR of 70% or higher to initiate a position. Others may consider a lower threshold, based on other indicators they use. Lower ROAR scores might help point to potential short opportunities, or put option purchases. ROAR is a research data point, not a total decision system. Thus, each trader using it can do so in whatever way makes sense to them.
It’s also important to note that lower ROAR scores do not mean a stock can’t go up 10% from here before it drops 10%. It simply means that the odds are longer that it will happen.
In this way, ROAR scores are similar to how horse racing often works. The “favorite” in a race wins a lot, while “longshots” have a lower chance of winning the race. However, longshots do win races, every day. Just as every horse has a chance, and every team in pro sports games has a chance of winning, so does every stock have a chance of gaining 10% before dropping 10%.
For example, if a stock’s ROAR score is currently 30, that signifies that according to the ROAR method, the stock has a 30% chance of rising 10% before it falls 10%. Naturally, that implies a 70% chance that its next double-digit percentage move will be down.
ROAR Is for Newer Investors, Non-Technicians, and Pros Alike
When my late mother would take us kids for ice cream, she would always remind us that we had more than 30 flavors to choose from. Yes, it was all ice cream, but we could each have it our way. ROAR aims to be a different type of treat for investors of all stripes.
For those new to investing or at least to stock charting, ROAR is as simple as answering the question “what’s the number today?” For years I have used a basic version of this for my subscribers, based on the S&P 500 Index. At any point in time, they know what the ROAR score is for the S&P 500 Index ($SPX). The lower the number, the more risk they are taking to pursue the same dollar of profits. My 2-ETF ROAR portfolio allocated only to SPDR S&P 500 ETF Trust (SPY) (stocks) and SPDR Bloomberg 1-3 Month T-Bill ETF (BIL) (T-bills) has been as competitive in the modern market era as strategies that inventors twist themselves into knots trying to “beat the market.”
My current work expands that concept to any security on any trading day, so newer investors can have a snapshot measure of risk and reward for any stock or ETF they look at. For more seasoned traders and investors, they are more likely to take the basic elements of the ROAR system and “make it their own.” I am excited to learn how people are interacting with my proprietary research and to interact with them to help them best apply it as they see fit.
I may have created ROAR, but by deciding not to keep the ongoing scores to myself, the goal is to provide the investing community at Barchart and beyond with a powerful tool to add to their arsenal. Decades back, I was front and center when Morningstar, Value Line, Seeking Alpha and others opened up their rating systems. My personal version of that is ROAR scores for stocks and ETFs.
Like those methodologies, what I have created and now make available to the outside world is one factor to be considered as a helpful input into any investment decision-making process. But it is not a substitute for professional investment advice or for thorough research to understand what one owns.
ROAR: Built to Reduce Investing Complexity in Modern Markets
The post-pandemic era has been defined by sharper stock price movement in both directions and a lack of sustainability for many stocks when they do rise. For traders, this means that having an unemotional tool for comparing and analyzing stocks and ETFs is especially timely.
The Sungarden ROAR score helps market participants to size up potential trades by taking a different path with the intention of providing less generic and more useful insight into any security, at any time.
On the date of publication, Rob Isbitts did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
