Power Gauge Rating
The Chaikin Power Gauge Rating (PGR) is the core of the Chaikin Analytics system. It combines 20 factors into a simple, reliable indication of a stock’s potential performance relative to the market over the next 3-6 months, and is supported by 10 years of independent backtesting.
The model looks at the following components:
- Financial Metrics
- Earnings Performance
- Price/Volume Activity
- Expert Opinions.
The rating ranges from Very Bearish (likely to underperform) to Very Bullish (likely to outperform).
How is it computed
Each market day, a Power Gauge Rating is computed for all stocks in the system which have at least one year of trading history and report earnings. Recent IPOs and ETFs will not have a Power Gauge Rating.
Twenty factors are weighted and combined into a daily PGR value. The end-of-week rating is stored as the historical value for the week.
The model is designed so that in non-trending markets there will be a consistent percentage of stocks with each rating at any given time. In strongly trending markets there may be more Bullish or Bearish stocks.
How Do I use it
Since it includes so many key technical and fundamental metrics, the PGR can be an important building block in a Buy/Sell evaluation.
In short, the easiest way to benefit from the PGR is: consider buying or holding Bullish stocks, and avoiding Bearish stocks.
Of course, any investment decision depends on many factors, including suitability relative to your financial goals. The PGR should not be be used in isolation – you may want to consider other factors such as Industry Group strength and timing, which Chaikin Analytics Signals are designed to assist with.
The following are the 20 Power Gauge Factors, grouped into 4 top-level Components.
These can be seen by expanding the chart header.
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.
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.
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-".
Sample Chart from Chaikin Analytics
If a Very Bullish or Bullish stock closes above 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 drops below 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 drops below its long-term trend, it is at higher-risk for a breakdown. By clipping the rating to Neutral+, this is like applying a cirtcuit breaker - it lowers the risk of the model, and reduces volatility in your returns if you are following the model, until such time as 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.
Volume Spike exception
(Or “Why are some stocks Bullish below their long-term trend?”).
If a Bullish stock which has broken down below its long-term trend has a spike in trading volume, this indicates that the stock may be finding a bottom and there may be a potential change in direction. In this case, the rating will be allowed to return to Bullish. Conversely, with Bearish stocks above their long-term trend that have been clipped to Neutral, a volume spike can return the rating to Bearish.