Industrial Harmony

So what good is information without any sort of context?  I would imagine that no background would render even the most valuable data utterly useless.  Therefore I feel the need to expand upon the information I have been presenting since Monday.

First, a brief background.  For a long, long time I have been trying to develop an analysis tool for objectively evaluating industry performance.  After coming up short and unsatisfied many times, I finally discovered a data source that provided the raw data that I really needed.  With this in hand, I set out to develop an algorithm that quantifies individual industry relative strength versus “the general market”.  I chose the S&P 500 as a proxy.

The time frame for the comparison takes place over the prior 3 months.  For what it’s worth, my style of trading is relatively short term, therefore due to the dynamic nature of the market, industries that were strong 6 months ago are likely of little interest to me.  I make relative strength calculations at 5 different points throughout the three month time-frame.  Those scores are then weighted (based on time) and combined to provide an overall “Alpha” score.  Each day those scores are then compared to scores from the previous 5 sessions and a weighted average is taken again.  This time the greatest emphasis is placed on the most recent scores.   This final score is the basis for my industry performance presentation.  I haven’t decided if/when I will provide actual numerical scores, but a score of 0 would be identical to the score of the S&P 500.  The scores are linear in nature.

As for the nitty-gritty.  The Top 10 Industries are, like the title suggests, the current top 10 scores for the current day.  Top Daily Industries are the industries with the highest single day score change.  Top  Weekly Industries are industries with the highest score change over the previous 5 trading sessions (i.e. week).  Abnormal Strength are industries that currently have a score that is +2 standard deviations above their historical average.  At this point, I am of the opinion that there really is not enough data to make strong predictions based on this information, but as the sample size grows, extreme scores could gain greater meaning.

In the opposite direction, the Bottom 10 Industries are the ten industries currently with the lowest scores.  Worst Daily Performance refers to the 10 industries which had the greatest decrease in score since the previous session.  Worst Weekly Performance are the 10 industries with the greatest decrease in score over the previous 5 sessions.  Unusual Weakness is the opposite of Abnormal Strength, with these industries having scores that are -2 standard deviations below their historical mean.  The same caveat applies here.

I hope this brief introduction can shed some light on the information I’m providing to everyone.  For me, this is merely the initial step in the stock research distillation process, guiding me to the industries that are currently performing the best.  I want to try and buy the best stocks in the best industries, and I have found this tool helps me get closer to that goal.  I hope it can be of use to you.  Feel free to let me know what you think.  Thanks for reading.

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