CMBT Theory
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1. Trend is driven only by those taking trading actions
Primary price movement trend is mainly driven by the behavior of those investors who take trading actions; not by anyone else who takes no trading actions.
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2. Market trend reversal can be detected by early bullish or bearish trading actions
"Smart money" trades from institutions and related parties offer early signals of trend reversal. Those trading actions with up or down ticks supported by volumes contribute to the formation of trends and trend reversals.
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3. Trend can be timely identified (but not predicted) when sentiment is measured
Long-term or short-term trend reversals can be statistically identified most of times when it is happening if we can measure the net effect of bull and bear market sentiments.
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The Yin-Yang Index is developed mainly based on the above three CMBT principles and the Dow Theory named after Charles H. Dow to measure the stock market psychology. The more accurate and timely of such measurement, the better the trend identification accuracy. Even the trend reversal is clearly identified, the trend can still make sudden change again if the opposite power is strong enough driven by the future unexpected events.
The CMBT theory formulated by Dr. Charlie Q. Yang includes seven additional important principles listed below. These principles may help understand the Yin-Yang Index and how to apply the Index to the practice of portfolio management and evaluation.
4. Trend is determined by volumes and changes of prices, not by absolute prices
Past prices have no direct impact on the future prices. Prices are only affected by forces of price changes and volumes of trading actions.
5. Trend reversal happens when the net effect of bulls and bears crosses zero
If any system can measure the total force of bullish buyers and the total force of bearish sellers, the trend reversal will then happen when the net effect of the combined forces measure crosses zero. The trend reversal is subject to happen anytime.
6. The effect of all events will affect the market trend
Any events, including but not limited to earnings, investor expectations, research reports, and political policies, will all create certain impact to affect the market trend. If the effect is strong enough, the trading actions will follow and the primary trend reversal can be triggered promptly.
7. Fundamental value can be created or destroyed by trading actions
Through trading actions, the market prices can be inflated and deflated and thus the perceived value can change overtime. It in turn can create or destroy the fundamental value of the underlying business due to the availability of capital market funding. The stock market is not a zero-sum game as some may falsely believe.
8. Market price is just the value perceived by all interested buyers and sellers
Market price is determined by collective effect of all bullish and bearish investors’ perception on the value at any given time. Fundamental value is a contributing factor but it does not directly determine the market prices.
9. Risk control is by design, not by short-term timing
Investment portfolio risk management can be optimized by asset allocation design, not by short-term timing of secondary or minor trends. If a primary long-term bull or bear trend can be detected, the weighting towards more aggressive or more conservative can enable a portfolio to out-perform the market. If the primary trend cannot be detected (side-way market), portfolio re-balancing will add value.
10. The stock market is a leading economic cycle indicator
The stock market overall driven by trading actions is a good long-term economic cycle indicator.
The CMBT theory formulated by Dr. Charlie Q. Yang includes seven additional important principles listed below. These principles may help understand the Yin-Yang Index and how to apply the Index to the practice of portfolio management and evaluation.
4. Trend is determined by volumes and changes of prices, not by absolute prices
Past prices have no direct impact on the future prices. Prices are only affected by forces of price changes and volumes of trading actions.
5. Trend reversal happens when the net effect of bulls and bears crosses zero
If any system can measure the total force of bullish buyers and the total force of bearish sellers, the trend reversal will then happen when the net effect of the combined forces measure crosses zero. The trend reversal is subject to happen anytime.
6. The effect of all events will affect the market trend
Any events, including but not limited to earnings, investor expectations, research reports, and political policies, will all create certain impact to affect the market trend. If the effect is strong enough, the trading actions will follow and the primary trend reversal can be triggered promptly.
7. Fundamental value can be created or destroyed by trading actions
Through trading actions, the market prices can be inflated and deflated and thus the perceived value can change overtime. It in turn can create or destroy the fundamental value of the underlying business due to the availability of capital market funding. The stock market is not a zero-sum game as some may falsely believe.
8. Market price is just the value perceived by all interested buyers and sellers
Market price is determined by collective effect of all bullish and bearish investors’ perception on the value at any given time. Fundamental value is a contributing factor but it does not directly determine the market prices.
9. Risk control is by design, not by short-term timing
Investment portfolio risk management can be optimized by asset allocation design, not by short-term timing of secondary or minor trends. If a primary long-term bull or bear trend can be detected, the weighting towards more aggressive or more conservative can enable a portfolio to out-perform the market. If the primary trend cannot be detected (side-way market), portfolio re-balancing will add value.
10. The stock market is a leading economic cycle indicator
The stock market overall driven by trading actions is a good long-term economic cycle indicator.