X-INDEX FUND Magazine Issue 2: September 2011
Oct
31
Written by:
Monday, October 31, 2011 6:13 PM
X-INDEX FUND Magazine Issue 2: September 2011
By Johan G. van der Galiën.
Definition X-Index Fund
This index fund is composed of initially the 50 lowest entropic (= X-Index) securities from 1,924 New York Stock Exchange (NYSE) securities whereof stock quotes can be downloaded with HQOUTE PRO. These 50 are the securities with the potentially highest profitability in the past, present and future. From the initially 50 securities there are at the moment still 42 actively traded. So these 42 securities, 10,000 shares per security, bought virtually all at once for about $ 1.8 million in total on 2011-08-08 closing prices, is the X-Index Fund and also called DOWN42 portfolio in this magazine.
How X-Index Funds work
As I have said in earlier documentation the X-Index correlates well with all known properties of stock quote distributions. Either positively or negatively. And one can speak of the quintessence of all market information! Let me give some example graphs what I mean by this, over a recent period of about one year, from the X-Index Fund stock quotes, with a time window of 20 trading days.
Fig. 1: The Overall X-Index curve (42 securities) with its two 95% (+/-) Standard Error of Measurement (SEM) bands. These three curves are shown, for comparison reasons, in all graphs. Also shown the at each 20th trading day snapshot of the Dow-Jones Industrial Average likewise the average Volume over the 42 securities (for each of the 13 time windows).
· When there is an “extreme” decrease in X-Index value there is a peak in the Volume.
· Extreme changes in X-Index seem to occur at bull-to-bear and bear-to-bull transitions and these are also the periods of high Volume.
· When the X-Index is in the positive region and it decreases within this region you can talk about a bear-to-bull market transition.
· When the X-Index is in the negative region and it decreases within this region you can talk about a bull-to-bear market transition.
Fig. 2: First order Autocorrelation calculated for each 20 days time window and averaged over the 42 securities and the same for Sigma (σ, standard deviation from normal distribution).
· Autocorrelation and Sigma are more or less perfectly negatively correlated.
Fig. 3: Average Trend and the $-Value snapshot of the X-Index Fund portfolio which incorporates all positively or negatively correlating effects. Which can of course sometimes be in sync with each other and vice versa. Therefore there is no simple or easy distinguishable pattern.
NB: Incidentally the Y = 0 line is about the (mean) Trend = 0. I remind you that the curves are all normalized to σ = 1 and mean µ = 0 to be able to compare.
· If the +SEM 95% is positive then the Trend is more or less also positive.
· If the +SEM 95% is negative then the Trend is more or less also negative.
In a later issue of this magazine I will show EXCEL linear regression results of the X-Index correlations with all common properties of stock quote distribution probability density functions. And this will be done over all the available ones from my 1,924 securities collection.
The X-Index Fund portfolio
From a list of 3,461 NYSE ticker symbols, from Wikipedia, HQOUTE PRO could download only stock quote files from 1,924 of these 3,461 securities. These files were analyzed by ‘The Automated X-Index Technical Analysis Software’, that curve fits to a distribution function I would like to call Omega (Ω), and entropy ranked. The 50 down ranking securities portfolio (DOWN50) was drawn and the ticker symbols, closing prices at 2011-08-08 (purchase day virtual portfolio) with 10,000 shares per security data were uploaded to Google Finance. After carefully inspecting the resulting spreadsheet, for 7 out of the 50 securities in this portfolio there was no trading anymore for various reasons or to less trading for Google Portfolio to take them into account or the ticker symbol is not a Google recognized one from the NYSE. Nonetheless remained 43 valid ticker symbols and consequently I spoke of the DOWN43 in the first issue of this magazine.
Now I must speak of the DOWN42 portfolio because the trading has stopped for ticker symbol SFN.
The resulting DOWN42 portfolio
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Ticker Symbol
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Closing Price ($) 2011-08-08
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# Shares
|
|
CBR
|
3.07
|
10000
|
|
CPE
|
4.9
|
10000
|
|
CSU
|
7.15
|
10000
|
|
CT
|
2.25
|
10000
|
|
EK
|
1.86
|
10000
|
|
EXE
|
3.71
|
10000
|
|
FCH
|
2.85
|
10000
|
|
FCS
|
12.27
|
10000
|
|
FR
|
7.81
|
10000
|
|
FRM
|
6.41
|
10000
|
|
GKK
|
2.35
|
10000
|
|
GMR
|
0.45
|
10000
|
|
GPK
|
3.66
|
10000
|
|
GSL
|
2.84
|
10000
|
|
HL
|
6.66
|
10000
|
|
HW
|
2
|
10000
|
|
IO
|
5.06
|
10000
|
|
IRE
|
1.13
|
10000
|
|
LSI
|
6.23
|
10000
|
|
MAG
|
1.45
|
10000
|
|
MEG
|
2.3
|
10000
|
|
MIM
|
24.96
|
10000
|
|
MNI
|
1.69
|
10000
|
|
MPG
|
2.25
|
10000
|
|
NCT
|
4.06
|
10000
|
|
NLS
|
1.66
|
10000
|
|
NTE
|
4.9
|
10000
|
|
NWY
|
4.12
|
10000
|
|
PKD
|
4.91
|
10000
|
|
QTM
|
1.77
|
10000
|
|
RAS
|
3.39
|
10000
|
|
SFI
|
4.61
|
10000
|
|
SRZ
|
5.93
|
10000
|
|
STM
|
6.31
|
10000
|
|
SWS
|
4.08
|
10000
|
|
TCI
|
2.26
|
10000
|
|
TGS
|
3.05
|
10000
|
|
THC
|
4.63
|
10000
|
|
TLB
|
2.79
|
10000
|
|
TRR
|
3.93
|
10000
|
|
VG
|
2.88
|
10000
|
|
ZLC
|
3.84
|
10000
|
Table 1: Google Finance upload data.
Performance of the X-Index Fund at 2011-09-23
Fig. 4: My Google Finance X-Index Fund screenshot, with only part of the securities, because of space limitations.
· At the time of printing and issuing of this magazine (2011-09-23). The X-Index Fund profitability was -3.38%. So negative!
· But during the period of its existence the X-Index Fund has beaten the common benchmarks most of the time! As you can see from the alpha’s (α) with the Dow-Jones Industrial Average benchmark in Fig. 4.
Evaluation last forecast (2011-08-08 to 2011-09-09)
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Period
|
Explanation
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|
2010-09-29 to 2011-01-07
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Rising of prices draw more traders to NYSE. Increasing Trading Activity with high Trending (+). Hence X-Index curves fall, Trading Activity (-), as ^DJIA rises.
|
|
2011-01-07 to 2011-06-06
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Stagnant (flat) stock market climate consequently side ways Trending ^DJIA and X-Index. Stable Volatility (-), Trading Activity (-) and low Trending (+).
|
|
2011-06-06 to 2011-08-08
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Initially short revival bull market followed by dramatically crossing 95% -SEM support. Sudden change of market climate from stagnant to bear.
|
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Next 20 trading days forecast
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This can only mean, with a 95% Confidence Level, very high Volumes (-) with extreme Volatility (-) most likely accompanied with negative Trending (-), in other words a severe bear market is expected. Moreover 2011-8-8 (day of virtual buying the DOWN43 portfolio) is most likely not the market bottom!
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And this is the actual performance of the now DOWN42 portfolio (in red):
Fig. 5: The performance of the now DOWN42 portfolio over the period of the last forecast (in red).
· As I now took a closer look at the graphs its not a sudden change from stagnant-to-bear but more (locally) like bear-to-stagnant at 2011-08-08.
· As the 2011-08-08 to 2011-09-09 curve violently goes up and down one can besides talk of a side ways or stagnant (because of the small resulting Trend of +1.4%) but also of a stochastic zero Trend. We have seen stochastic behavior after stock market crashes, but can it also herald a crash?
· We have seen indeed as predicted on 2011-08-08 high Volume and Volatility in the 2011-08-08 to 2011-09-09 period. This is also supported by the recent ^VIX graph from YAHOO Finance.
· I said in the prediction that there will be most likely a negative Trend. However the linear regression found +1.4% (as seen in Fig. 4) but this has a F-Significance of about 0.5. So actually one should talk about no Trend at all at the 95% Confidence Level (F-Significance > 0.05). So with a little fantasy I was right in my prediction on this point too!
Forecast market for one month after 2011-09-09
As we have seen in the Fig. 1 to 3 graphs: The going up and down of X-Index curves comes by a combination of numerous (+/-) effects. Some major and minor ones are:
· (-) Volume or Trading Activity.
· (-) Sigma: Risk or Volatility.
· (+) Potentially positive Trending.
· (-) Potentially negative Trending.
· (-) The degree that former prices influence future prices (Autocorrelation).
(+) = directly proportional with X-Index and (-) = reversed proportional. By all these and more effects the X-Index curves can look erratic but can nonetheless be explained (Table 2).
|
Period Fig. 1, 2 or 3
|
Explanation
|
|
2010-09-29 to 2011-01-07
|
Rising of prices draw more buyers to the NYSE. Bull market. Strong decrease in X-Index within positive region. Consequently peak in Volume and Trading Activity. Because X-Index is far in the positive region this is a period of high positive Trending. Because trading decisions are partly based on (rising) former prices there is also high Autocorrelation. Low Volatility and Risk.
|
|
2011-01-07 to 2011-07-26
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Stagnant (flat) stock market climate. Consequently side ways Trending X-Index and this is also true more or less for all the mentioned stock quote distribution properties.
|
|
2011-07-26 to 2011-09-09
|
Declining of prices draw more sellers to NYSE. Initially bear market then bear-to-stagnant transition at 2011-08-08. Severe deep dip in X-Index to negative region. Consequently period of zero to negative Trending and peaks in Volume and Autocorrelation. High Sigma and Volatility. At 2011-08-08 start of stochastic period.
|
|
Next 20 trading days forecast
|
-SEM 95% crosses the +SEM 95% Resistance red line far in the positive region. So I must rationally say, with a 95% Confidence Level, there comes a period of less Trading Activity, less Volatility and significant positive Trending because the X-Index is far in the positive region. $-Value of the DOWN42 portfolio since 2011-08-08 will then most likely increase. BUT according to the violent swings in the tail of X-Index graph, it could be that this swinging continues and we stay in a stochastic market in the (near) future. Then the above prediction is only temporary phenomenon for lets say a week as the market continues to swing up and down. Maybe this hypothetical stochastic market is heralding a severe stock market crash on Wall Street. All of this is also supported by the fact that Autocorrelation was extremely low, even at the lowest point of the year, at 2011-09-09 and lately the Volatility Index ^VIX keeps rising and rising. All of this is suggesting that the market has become irrational and unpredictable.
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Table 2: Explanation of the sections of Fig. 1 plus the forecast.
Buying and selling the X-Index Fund (until 2011-10-10)
· Buying: We are now (2011-09-23) in a down swing of a market in a stochastic state. Markets will swing even lower, anticipate for that. I hesitate to recommend buying in the near future. Nonetheless if you do: Limit you orders for each security about 8% below the 2011-08-08 closing price from Table 1.
· Selling: There is no gain in selling right now. Selling with a loss is not recommended, wait until the X-Index Fund has positive profitability again. This will always happen unless an Act-of-God intervenes.
Strategy
I advise a passive and index fund management:
· Buy all X-Index Fund stocks at once when the market index is low. Ideally on the moment of the market bottom of the ^DJIA, S&P 500 and NASDAQ benchmarks. Modify to your needs the DOWN42 Google Upload 2011-08-08 data. Despite the fact that I simply for reporting sake in this magazine virtually bought at 2011-08-08 (which was accidently a temporary bottom and support until 2011-09-21).
· No active selling losers or buying winners (or vice versa).
· Wait until market becomes bullish again.
· From the monthly Overall X-Index graph (like Fig. 1) and the X-Index Fund statistics from Google Finance, against the ^DJIA, S&P 500 and NASDAQ benchmarks, determine when to sell the complete portfolio (similar portfolios gave over 20 measurements an average profitability between 16% - 40% profit in 7 months).
· Recommended selling point in time will also be published and rationalized (Fig.’s, Tables or text) in this magazine. This also applies for buying points, to step into the X-Index Fund.
· Please see the X-Index Fund as a synergistic and holistic unity
For this magazine I simply delete securities, from the portfolio, that stopped trading on the NYSE for some reason or another (like a take over). So I do not do complete bookkeeping here! One also need to correct the Google Finance portfolio manually for occurring splits and reversed splits, otherwise the portfolio graph is not in sync with the spreadsheet. With the Google Finance interactive graph a determined user can set any date, at least about one month back in time, as starting point for benchmarks versus portfolio profitability calculations (i.e. like in Fig. 4).
See also:
Johan G. van der Galiën ‘Recent Bull Periods and the X-Index Effect’ Journal of Randomics 10 1-10 (2011) http://www.satoconor.com
By Johan G. van der Galiën.
Satoconor © 2011
1 comment(s) so far...
Re: X-INDEX FUND Magazine Issue 2 September 2011
Test B
By TESTB on
Monday, October 31, 2011 9:05 PM
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