Balancing offense and defense: Buff Dormeier’s data-driven approach to portfolio management

This article was produced in partnership with Kingsview Partners.

Buff Dormeier’s innovative approach to market analysis, grounded in the meticulous study of capital flows and volume momentum, sets him apart as a leading expert in the field. His strategies not only emphasize the balance between offense and defense but also highlight the importance of informed, data-driven decision-making.

“Our Kingsview Volume Factor portfolio strategies utilize volume momentum as our offensive catalyst,” says Dormeier, chief technical analyst at Kingsview Partners and index specialist with Monarch Funds suite of ETFs. “However, unlike many portfolio managers who focus solely on offense, we also emphasize defense. Defense wins championships by always keeping you in the game.”

Dormeier’s approach is deeply rooted in data. Armed with proprietary indicators and investment strategies, he has developed methods to track capital flows, which he believes provide a clearer picture than fundamental assessment alone. “I find that following the data does a much better job than personal sentiments,” Dormeier explains.

“My intellectual property involves methods to track the flow of money. For instance, if you buy a stock today with your earnings, that is new money entering the stock market. Conversely, if you sell a stock to buy a boat or property, that money exits the market. My technology constructs cap-weighted dollar volume to track all the money moving in and out of the stock market, as well as the volume of shares traded, also cap-weighted.”

Dormeier has found his niche in understanding volume and tracking where capital is moving. Unlike the volume data provided by financial data networks, which often doesn’t relate index volume to price, Dormeier’s capital weighted approach seeks to ensure a more accurate reflection of market movements.

Effective defensive strategies

Since early 2023, Dormeier’s data has indicated a bullish trend in the US equity market. “Volume has been leading price, which is a very healthy condition. It’s like a plane needing fuel to climb higher – the market needs capital to continue its ascent,” he says. This analogy underscores the importance of capital flows in sustaining market growth, a core principle in Dormeier’s analysis.

The defensive strategy involves repositioning portfolios during perceived downturns, as seen in 2022, to attempt to minimize losses. His Kingsview Volume Factor models follow market capital flows closely, and when those trends turn negative, as they did in 2022, they shift portfolios from an offensive to a defensive stance.

Preserving capital during potential downturns may increase the likelihood of achieving successful financial outcomes for clients. For example, if a risk-managed portfolio lost 10 percent in 2022, it needed only an 11 percent gain in 2023 to break even. In contrast, if you were in the S&P 500 or large-cap stocks, you might have lost around 20 percent, requiring a 25 percent gain to break even. Those invested in NASDAQ stocks could have seen losses of over 35 percent, necessitating over a 50 percent return to recover. Although the NASDAQ is currently excelling, it was the S&P 500 that made new highs first. This is because the S&P 500 didn’t lose as much, making recovery easier. It tends to be easier to bounce back from a 20 percent loss than from a 35 percent loss.

Dormeier’s strategy goes beyond just offense and defense. He emphasizes the importance of transitioning between these states. “Few portfolio managers play defense, and even less employ special teams. But once you’re on defense, how do you transition quickly back to offense?

That’s special teams. Volume sentiment helps us identify potential capitulation and then use this information to gauge our re-entry. For example, you probably don’t know anyone who is always right. But most likely you do know several people who have a knack for doing the wrong thing at precisely the wrong time. Emotional investors may buy on greed and sell on fear. Volume sentiment allows us to track those behaviors and do the opposite at what we believe are pivotal turning points. This is important because, generally, the strongest point of the move in a bull market is its birth – the transition from a bear market to a new bull. Awaiting a change in the primary trend may mean losing out on the most significant segment of the run.”

According to Dormeier, it’s essential to focus on market themes attracting the most capital, a principle that applies to both individual stocks and entire sectors.  Effective risk management is crucial in Dormeier’s strategy. “We follow capital flows closely and reposition our portfolios when trends turn negative,” he says. This approach can help maintain lower volatility, allowing for the possibility of quicker recovery and repositioning our portfolios for sustained long-term tenure.

Educational contributions

Volume analysis reveals the true state of the market, showing which direction money is moving and which prevailing trends are currently garnering capital flows. The markets are highly efficient and intelligent – perhaps the greatest of discounting mechanisms – providing practical insights based on actual market behavior. According to Dormeier, price and volume represent real intelligence, not artificial.

Not only does Dormeier apply these methods to portfolio management but he also teaches them through his books. His first book, Investing with Volume Analysis, explores employing volume as an edge in portfolio management. This book, which won Trader Planet’s 1st Place Star Award and was named the Technical Analyst’s Book of the Year for 2013, focuses on how to use volume as a performance driver.

His upcoming book, The Volume Factor, takes this research further, positioning volume as “the monarch of all investment factors, the one that rules them all.” Dormeier believes that an enlightened perspective on capital flows empowers effective tactical positioning. By introducing new cutting-edge market analysis, Dormeier’s Volume Factor unveils a new realm of market understanding. This framework of informed decision-making can empower advisors with the tools to navigate uncertain markets.

This new work aims to show how volume analysis may bridge the gap between goals-based planning and behavioral finance, creating goals-based investing strategies. These strategies aim to assist investment advisors in achieving successful financial outcomes for their clients by managing risk while capitalizing on prevailing market trends.

“Volume isn’t merely an indispensable piece of data; nor is it just a leading indicator but an undiscovered market factor for thriving in bull markets while safeguarding capital in bear markets,” Dormeier emphasizes. Through his educational contributions and ongoing research, Dormeier offers valuable insights that may help investors navigate the complexities of the market with confidence.