2. Cluster Statistics
Cluster Statistics Summary
4. Sectors and Type: Cluster 3
5. The difference between P/E Ratio and M/B Ratio
For explanation on methodology and terminology see: http://www.technifundamentals.com/2010/07/explanation-page.html
Reflections on MOCABI
Last week we predicted a positive change in the S&P500, but cautioned that it was a very weak signal. As it turned out the S&P barely budged, going from 1101 to 1104 for the week. But I am beginning to get around to the view that, for short term predictions, predicting the direction of a stock is easier than predicting the direction of a market Index. Short term predictions viz from 1 to 3 days, are more determined by technicals like Momentum, Liquidity and Volatility than fundamentals. Each stock has its 'fingerprint', its characteristics as moulded by the type of shareholders the stock has [which in turn determine their investment style], the nature of the Company's business, the sector it is in, the cyclical nature or trend of the trades on this stock etc. Some stocks are more predictable than others, and if you can identify such stocks, your short term prediction based purely on mathematical techniques, might carry through if during the fleeting time window of opportunity no big external shocks rock your prediction. For that reason, this project may in future stress on short term predictions of 'predictable' stocks. How do we identify such stocks? By using our good old friend the SOM to first measure degrees of similarity between all stocks, and clustering them. In that way, making a prediction for a homgenous group is easier. This is also why it is difficult to predict the direction of an Index-because it consists of a group of non-homogenous stocks. [Index stocks are by definition non-homogenous because they are supposed to represent the broad market].
Market Outlook
Despite what we say above, the analysis of Market Outlook using screened stocks of the ValuEngine Model screens is still pretty good. For this week:
S1 is the cluster that contains most of the S&P500 stocks and is 71.21 % of the stock population of our SOM. S2 contains most of the S stocks and is 14.77 % of the population, while S3 contains most of the L stocks and is 14.02 % of the population. The ratio of L/S is 0.62 in S1, 0.19 in S2 and 36.0 in S3 i.e. S3 contains no S stocks. Thus, the S&P500 will be on the weaker side, but stocks like those in S3 will outperform the Index. Again, the market outlook is ambivalent. Image 2 arrows show that factors like P/E Ratio and EPS Surprise will be inportant factors.
Stocks
Image 4 is revealing. This list of stocks are the screened ValuEngine stocks which appear in Cluster S3. They are all Long [as indicated by the L tag of their label] and out of the 36 stocks, 20 are Value stocks, 12 are Quality stocks and only 3 are Growth stocks. This is a great contrast to last week when most of the stocks in the L cluster were Growth stocks.
Another interesting fact can be gleaned by looking at image 5 which shows P/E and M/B windows of the SOM. The color scale at the bottom of the windows measures the P/E and M/B values. The lower the better, i.e. the more tending towards Blue the more desirable. Note that low M/B does not equate with low P/E. Some Blue areas of the M/B window are in fact areas of higher P/E as shown by their Yellow/Orange colors. Which means that more tangible assets do not necessarily translate in to higher earnings [think technology and those companies where the Company's value is its intangible assets]; or that such assets have been inaccurately valued [think banks where book value of loans are still at optimistic (or unrealistic) valuations]
