Beta attribute window
1. U-Matrix of clusters and selected areas
2. Statistics of each cluster
3. Area of high 1-month forecast return %
Stocks picked from S2
5. Stocks picked from S3
For explanation on technology, methodology and terminology, see: http://www.technifundamentals.com/2010/07/explanation-page.html .A more refined way to visualize clusters created by a SOM is to use the U-matrix (unified distance matrix). In image 1 above, lighter colored areas are more dense than darker colored areas. Thus there are more stocks located on the lighter colored nodes. In this post, we use ValuEngine to screen for all stocks with a minimum average daily volume of 100000 shares and a minimum market cap of $100 million. There were 2867 stocks in this category, and they are plotted on the SOM. Image 2 shows that clusters S2 and S5 while both having low P/E and valuation, have different characteristics with regard to the other model variables. While S2 consists of smaller cap stocks, S5 stocks are big cap. S2 are lower volume stocks while S5 are highly liquid stocks. S2 stocks have high forecast 1-month forecast return [see area of high forecast return in S2] while S5 stocks have low 1-month forecast return. Also [see top images] S2 stocks have higher Beta and volatility than S5 stocks. So its a choice between big cap slower movers with lower risk or smaller caps with higher risks but greater potential returns. The lower two images are the stocks picked by selecting the densest areas of S2 and S5 according to the U-Matrix SOM. It is not surprising that S5 selected stocks include stocks like Kellogs, Campbell Soup and Kimberley-Clarke while selected S2 stocks are relative unknowns.
If you like QE2 [quantitative easing] go for S2. If you think that QE2 is going to cause inflation, continued weakness of the US$, and eventually, higher borrowing costs [yields] for Treasuries; and retaliation by other countries whose currencies are getting stronger, go for S5. these are the companies with operations in other countries, and whose earnings when translated back to US$ will grow even more. Or they are recession proof public Utility services and garbage collectors. Personally, I prefer S5 stocks. I don't think that QE2 can hold up the market for long.
