Self-Organizing Maps [SOM] are a class of Artificial Intelligence that cluster objects according to their degree of similarity. SOM are able to simultaneously take into account many variables representing the characteristics of the objects, and place them in clusters. Within each cluster and on the map as a whole, the distance of an object [node] on the map relative to all other nodes, is a measure of the degree of similarity of the object to its 'siblings'. Taking the example of the stocks in the Oil Industry, Service Companies like BJ Services, Halliburton or Schlumberger should be in the same cluster, or at least close to each other. Or Oil majors like Total, BP, Exxon-Mobil should also be close together. There are more than 20 variables [characteristics] of each stock that determine the construction of my SOM and these include fundamentals like its P/E, M/B, analyst estimates and surprise, volatility, Sharpe Ratio, 5-year return etc.Therefore, taking into account all these factors, stocks in the same cluster or close to each other have a greater degree of similarity. Stocks from different niches of the industry may be found close together and this is regarded as an anomaly that may be an opportunity for arbitrage. For example, if rig operator Rowan is far away from fellow operator Transocean on the map, it pays to know why and if Rowan is undervalued. Action can then be taken to go Long on Rowan and Short on Transocean.
The image above is a SOM of oil industry stocks with market cap>$1 billion, and daily average vilume > 500,000. That the oil industry is a diverse industry with many players doing quite different things can be shown by the great number of natutally formed clusters on the SOM viz 11 clusters.
NOW for a limited period only, I am offering Free to industry analysts and investors who request by ssending me an email to tiankhean@gmail.com , a SOM of their industry of interest. The industry expert will be able to identify stocks which are out of sync. In addition to the SOM [sent as a .jpg], I am able to give the figures for each of the clusters pertaining to their following characteristics:
Valuation [+/1 %], ValuEngine 1 to 5-Engine Rating, Average Volume, Last 12-Month Return %, Sharpe Ratio, 5-yr Return %, Forecast 1-m Return, Forecast 1-yr Return %, 1-year chance of gain, Volatility %, Expected EPS, EPS Surprise, Market Cap, P/E, M/B, P/S, Actual EPS, Forecast EPS, Beta.
* Please note that Industry SOM is an experimental product to gauge market demand and if successful, I will have to consult with ValuEngine Inc for future pricing and mode of distribution.
