Introducing the 'Map of Stock Trends'

The Stock Trends Inference Model is a quantitative approach to interpreting the categorical data that is the core value-added analysis presented here. The Stock Trends indicators are derived from base tenets of the market technician’s encyclopedia - a toolset designed to reduce a complex market dynamic to a categorical, and hierarchical framework. By evaluating the statistical significance of this framework we can apply meaningful algorithmic trading methods.

However, the first step is to understand the data and interpret the Stock Trends Inference Model results. Every week we sample 30-years of data to assign a probability for future returns on over 7,000 North American stocks. Using combinations of categorical data and making assumptions about the distribution of returns, we apply statistical inference methods to differentiate stocks (ETFs and income trusts, too) by the estimated returns in the coming periods (4-weeks, 13-weeks, and 40-weeks). You can see the result of that analysis in the Profile section of each Stock Trends Report.

I’ve already introduced the Stock Trends Inference Model in previous editorials. Subscribers to Stock Trends Weekly Reporter can interpret this information weekly, as well as review the reports on issues with the best expected returns. The Stock Trends ‘Select’ report, as well as the Top 4-wk/13-wk/40-wk returns expectations reports give users a new way to make the Stock Trends reports actionable.

However, these reports can be augmented by data visualizations. Graphical presentations of data are always useful in translating vast data points into more accessible interpretations. A good graph saves us time and points us in the right direction.

The Stock Trends Profile reports include heatmaps which help us compare returns expectations among industry group member stocks. Another useful display method for this data, especially when we want to broaden the use of the data hierarchy, is a treemap. A treemap is specifically designed for hierarchical data and is commonly used. A popular example in our equity analysis space is the Map of the Market.

Today I am introducing a treemap of the Stock Trends Inference Model - the Map of Stock Trends. It takes the data results from the weekly analysis, sorting 4-week and 13-week returns expectations by trend category.

In the treemaps displayed below large capitalization stocks (U.S. stocks with a market cap greater than $1-billion, Canadian stocks with market cap greater than $500-million) are grouped by Stock Trends indicator (Bullish , Weak Bullish , Bearish , Weak Bearish , Bullish Crossover , Bearish Crossover ). Each stock within these groups are visually differentiated in two ways: spatially by their relative probability of a return greater than the base 13-week mean random return (2.19%) , with larger cells (higher probabilities) sorted and displayed from the upper left quadrant and moving down to the lower right corner for the lower value. Secondly, the 4-week returns expectations are differentiated visually by color gradation, with darker green hues representing stocks with higher probabilities of exceeding the base average 4-week random return (0%) and darker red hues representing the stocks with the poorest probabiltity of a positive return in 4-weeks.

 

 

Dark green cells in the upper left of each trend category are stocks with the best statistical trend characteristics. Dark red cells in the lower right quadrant of each trend category are stocks with the worst statistical trend characteristics.

Below are the current Map of Stock Trends treemaps for the U.S. and Canadian stock markets. Each Stock Trends trend indicator category grouping is identified by the translucent indicators in the background of each box. In the future the treemap will be developed in an application that allows users to click on an individual cell and go directly to individual Stock Trends Reports, but for now the visualizations help direct us to the stocks with the most favourable current Stock Trends Reports.

 

U.S. stock exchanges - big cap stocks

Toronto Stock Exchange - big cap stocks

Bearish sentiment builds

Investors are always looking for the door. Even when returns are abundant and investor sentiment is wildly bullish, shareholders know that plump investment accounts are but paper profits - only real when the trigger is pulled and equity is once again cash. The degree to which investors look more nervously to the exit is proportional to the degree to which their equity positions are compromised. How we measure that compromise helps us identify critical shifts in investor sentiment and recognize high-risk market periods.

Stock Trends is by design a categorical reporting framework that gives us a measure of aggregate investor sentiment and a metric for determining when market participants are feeling the squeeze and most ready to dash for the cash. The Stock Trends Bull/Bear Ratio is now serving notice that the exit doors are wide open.

Most market analysts look at benchmark indexes of price level, pointing to areas of support and resistance to anticipate market rallies and corrections. Certainly, the 6% drop in the S&P 500 index from the market high in September sounded alarm bells. But we have had corrections of 5% and more multiple times during the bull market run since 2009. Can we expect this is just another typical and expected correction that will soon be subdued? Price level analysis can conjecture about that, but a measure of market breadth is the best barometer of how sentiment has truly shifted.

The Stock Trends Bull/Bear Ratio measures the distribution of Stock Trends trend categories and tells us something quite simple: are the majority of stocks trending positively or negatively? Are the diversified holdings of investors buoyed by a rising tide or sinking in aggregate?

The Stock Trends trend indicators categorize individual trends by the conditions of a simple moving average study. The base categories -Bullish or Bearish - are determined by the relationship of the 13-week and 40-week moving averages of price. If the 13-week average price is above the 40-week average price the stock is categorized as Bullish. If it is below the stock is categorized as Bearish. This is a factual reporting of past price performance.

The price smoothing aspect of average prices gives us a clearer idea of trends, and although these longer-term time parameters are lagging in nature, they do make it possible to characterize long-term price movement. It is this long-term price movement that most shifts the balance of investor sentiment and creates heightened periods of anxiety about equities.

Stock Trends tabulates the Bull/Bear Ratio for individual North American exchanges. The New York Stock Exchange Bull/Bear Ratio has been plummeting since August, and is now at 1.07. The Nasdaq Bull/Bear Ratio dropped below 1.0 in June and is now at 0.66. When we look at the composite of both major exchanges - some 5,660 common stocks that currently have Stock Trends trend indicators - we get a good look at the trend breadth of the U.S. stock market.

The graph below highlights periods where the Stock Trends Bull/Bear Ratio for the combined Big Board and Nasdaq exchanges has been rated as 'Bullish'. These shaded areas tell us when investor sentiment provides more fertile ground for market rallies and rebounds. There will be times when the S&P 500 index rallies without broader market support , like in late 2006, but these can represent divergences between large cap and small cap performances. Generally, a strong bullish investor sentiment is characterized across the stock market. The Stock Trends Bull/Bear Ratio gives us that representation of market breadth.

Where are we at now? The U.S. market Bull/Bear Ratio has been flirting with a Bearish investor sentiment reading since the market top in the summer, and has now dropped to 0.7. Canadian investors sentiment has also dipped into Bearish territory - the Stock Trends TSX Bull/Bear Ratio fell below 1.0 this week (now at 0.85).

Investors should take note that this aggregate North American trend condition makes the market vulnerable to a crash as investors increasingly weigh in about making an exit. The S&P 500 index's 4.1% recovery last week may be heartening, but fading investor sentiment should keep investors on high alert.

Stock Trends Picks of the Week: a statistical look

The primary action matrix published here is the Stock Trends Picks of the Week report. These reports are groups of stocks, organized by exchange, that match a defined criteria or combination of variables. Each of these observations are results (roughly stated here) of the following query: select stocks and ETFs, valued over $2, that have a Stock Trends Weak Bearish () or Bullish Crossover () trend indicator, a minimum level of trading volume, and a Relative Strength indicator of at least 100. Those that are Weak Bearish must also have a high probability of being a Bullish Crossover within three weeks.

This weekly screen focuses on Weak Bearish and Bullish Crossover stocks and ETFs for a simple reason: this is the transitional trend moment where issues are theoretically primed to begin a new bullish trend. Although the parameters of Stock Trends are by definition lagging, the assumption is that the long-term trend has or will change category. Sometimes arriving late to the party, these selections still arrive in time to have the forces of trend work for the trade. That is the modus operandi for the Picks of the Week report.

However, the report does not filter down to deeper levels of categorizing observations, and as a result the list is too extensive to use without additional filtering. It is really up to the investor to match the trend qualities that are presented and the technical merit of each potential trade. That is an important question: how do you isolate the best trading opportunities from the Picks of the Week report?

 

The answer to that question does not come easy, and I won’t attempt to answer it in this editorial. Instead, let us just say for now that one way is to draw at random from the Picks of the Week report. Before we assign value to the report itself – never mind finding the optimal trade within the report – it is important to know how outcomes of the report stack up against random outcomes more generally. Will random selections from the Picks of the Week report yield better results than random selections from the broader population – namely, all stocks and ETFs? Surely, there should be a statistically significant difference in the two probable outcomes, otherwise the Picks of the Week report lacks credibility.

 

Before we look at comparisons between random sample performance of the Stock Trends Picks of the Week and from a broad sample of the data population, we can get an understanding of the central tendencies and distribution of random samples of the Picks of the Week report. For instance, if an investor simply bought 5 different random Picks of the Week selections – what would be the statistical representation of those choices? This kind of mean analysis of random samples is a common statistical method in probability models.

 

Let’s take a sample of the Picks of the Week report: all selections, across all exchanges, since the beginning of 2012. The sum of the weekly picks during this period is 6,599. That’s a big grouping and includes all picks right up to February 8, 2013. The inclusion of very recent Picks of the Week (those in the last month, for instance) is problematic in that it does affect central tendency and distribution of the positive returns, but not in a more significant fashion than the use of “end-of-period” returns.

 

There are obvious problems in measuring results for a given period. For instance, stocks may reach a high and subsequently retreat, thereby under-reporting possible results if a simple end-of-period statistic (based on the most recent closing price) is used. Also, in practical terms, stocks that have hit stop levels may have been sold before the end period, thereby reducing the amount lost on the trade. Nevertheless, we’ll simplify this analysis to make the evaluation on a very crude level. We are asking: if an investor blindly picked 5 different stocks/ETFs from the Picks of the Week reports at any point during the time frame and held them to the end-point (February 15, 2013), what is the mean return and what would the distribution of those average returns look like?

 

First, here is a summary table and histogram of these Picks of the Week returns (% change since selection):

 

 

 

 

Minimum value (PSN-T)	1st Quartile	Median	Mean	3rd Quartile	Maximum value (SNTS-Q)
-98.3	-4.0	6.4	8.678	20.0	274.3

 

 

 

 

 

number	standard deviation	median absolute deviation	range	skew	kurtosis
6599	28.75	17.64	372.6	1.33	7.51

 

 

When we present the Stock Trends Picks of the Week, though, our expectation is not that every trade will be successful. However, we would like to see that the distribution of results is favourable. In practical terms, an appealing distribution will be asymmetrical, skewed positively with a fat tail to the right. While we can describe data with mathematical determinants that tell us of likely results, including simple measures of central tendency such as the mean and the median, in the end each pick represents a random sample of this subset of the larger population. We would want to see how these descriptive terms compare to the population itself.

 

We won’t make an attempt to calculate the population distribution now, but we can estimate that it would be close to a normal distribution, which would be symmetrical and possibly centered at the zero value, depending on the market’s overall direction. However, we can see that the distribution of the Picks of the Week sample is asymmetrical, that it is skewed positively – a long tail to the right. Half of the results fall with the 1^st and 3^rdquartile (the interquartile range)– between -4% and 20%. If an investor were to buy just one of the many selections in the Picks of the Week report since the beginning of 2011 their trade would have a greater than 95% chance of resulting in a return between -29 and 42%, which represents all those picks within 2 median absolute deviations (remember that the actual results obtained may be different in a real world scenario – profits booked at higher prices, losses capped at higher prices when a stock holding begins to retreat).

 

But putting all your eggs in one trade is not a trading plan sensible investors would endure. It is presumed that an investor would spread risk across trades. We should then be more interested in the distribution of average returns on samples of several picks. Let’s again assume that the investor makes a handful of trades in the period based on random selections from the reports (again, across all exchanges), and holds them until the end period. These mini-portfolio results should tell us something about the effectiveness of the Picks of the Week report.

 

A basic statistical method often used is sampling. By taking a random sample multiple times – actually many, many times over – we can estimate probable outcomes. Generally, this kind of resampling tends to prove a basic statistical truth: regardless of whether a statistic shows a non-normal distribution, as the sample sizes increase the statistic will tend toward a normal distribution. This is called the central limit theorem. However, let us take a first step and keep the sample size consistent with money management constraints and estimate that an investor’s portfolio would consist of at least 5 positions.

 

Bootstrapping 1,000 random samples (with replacement, since each of these samples is an independent portfolio) of those 5 selections from the Picks of the Week report generates the following histogram representation of the sample mean (average return of the 5 selected picks) distribution, as well as a summary table:

 

 

 

Minimum Value	1st Quartile	Median	Mean	3rd Quartile	Maximum Value
-25.08	8.11	17.77	18.9	28.06	90.4

 

 

 

 

 

number	standard deviation	median absolute deviation	range	skew	kurtosis
1000	15.91	14.83	115.48	0.58	0.84

 

 

Now we see that the measures of central tendency have moved up – the mean (of the sample means) is 19% - and the distribution is closer to a normal distribution. More importantly, most of the sample means are above 3% (one absolute deviation below the median). The following box plots of the sample returns and the sample means returns give us a good graphical representation of the data.

 

 

Differences in the kernel density plots are also represented by the horizontal shape of the violin plots.

 

 

Overall, this analysis indicates the Picks of the Week reports have a good record of delivering trades with above average performance. This analysis does not go deeply enough in the data to indicate optimization and does not accurately compare against random sampling of the broad population of stocks. Nevertheless, it gives us an idea of the statistical metrics behind the performance of this particular subset of Picks of the Week selections.

 

I’ll be digging further into the Picks of the Week report and try to isolate various combinations of the Stock Trends variables and trading stats that change the returns distribution significantly from the sample’s distribution. There are some things we can learn about price momentum and how it delivers different results based on the sector, market capitalization or the price of the stock, and other variables. Applying more rigorous statistical analysis of the Stock Trends indicators will be the primary goal of editorials. Also, while there may be room for a return to market commentaries, I am the first to recognize there are many, many sources of “opinions” about the market direction. I’ll try to stick to quantitative trading analysis, and statistical meat here. In the end, the decision about trading is up to the investor. The best any information service can do is provide a framework for understanding the risk and rewards at hand. There is no certainty - but it’s a lot better to know your odds.

Food stocks shopping bag

Although the market’s attention is oft in other sectors, consumer staples and related services are providing investors with a good trend trading opportunity. In the the current economic context this is an expected rotation, although the S&P Consumer Non-Cyclical Index remains in a bearish trend. A select group of food products and food retailers stocks outperformed the market in the last quarter and are showing up in the Stock Trends trend filters. Some stocks that are currently Stock Trends Weak Bearish and worth watching include Delmonte Foods (NYSE:DLM), Tyson Foods (NYSE:TSN), Food Technology Services (NASDAQ:VIFL), Whole Foods Markets (NASDAQ:WFMI), Cracker Barrel Old Country (NASDAQ:CBRL), and Diamond Foods (NASDAQ:DMND).

Encouraging trend signals

The March rally has moved many stocks into areas above downside resistance, an encouraging prospect for the bottoming out process. Stock Trends monitors for price movements above the secondary trend and categorizes these as Weak Bearish. Currently, 47% of trending stocks on the NYSE are Weak Bearish – See the Stock Trends NYSE Trend Distribution table and graph. The Stock Trends Picks of the Week filter focuses on these breakout opportunities, where price momentum pulls the stock out of a long-term bearish trend. If the market continues to rally, these stocks will be primary drivers.

UnBearable

The breadth of the bearish sentiment on the TSX now matches that of October 1998 - precisely 10-years ago. The Stock Trends TSX Bull/Bear Ratio has been published since 1993 and is represented in the graph below:

Trend picture

Investors should remain wary of the bearish sentiment that continues to weigh on stocks. The breadth of bearish sentiment can be viewed in the Stock Trends distribution graphs. The NYSE trend picture, shown here, is not particularly inviting. The surge in Weak Bearish stocks in early February - a positive move - lost conviction. The market is in a holding pattern. For trend investors the sideline is safe.

On the right road - YRC Worldwide

Transports continue to show some mettle in the face of a market downdraft. The Dow Industrial dropped 2.9% today, but the Dow Transport Index lost only 1.3%. In the face of a strong headwind transport YRC Worldwide (NASDAQ:YRCW) advanced $0.77 to close at $18.62. YRCW is a Stock Trends Weak Bearish stock and is worthy of a look.

Riding Ryder

Ryder System (NYSE:R) has caught momentum traders' fancy. Among a resurgent group of transport stocks, R has advanced from $40 at the beginning of the year to above $57. Today's move builds on a 13% gain last week.

Canadian Oil Sands Trust

Stock Trends shows a number of energy stocks in Weak Bullish territory, including Encana Corp (TSX:ECA), Imperial Oil (TSX:IMO), and Husky Energy (TSX:HSE). Canadian Oil Sands Trust (TSX:COS.UN) is another. It is recovering and should move back into a Stock Trends Bullish category as it trades above $36. Positive earnings and improved unit distributions will help COS.UN regain its lost ground.

Improving U.S. stocks

Canadian investors should start casting their nets again in U.S. waters. The trend distribution on the NYSE is showing an improvement that is not evident on the TSX. Although both exchanges are registering a Bearish trend breadth, the NYSE now has 16.6% of its stocks in a Weak Bearish trend. This compares to only 6.4% on the TSX. A rising level of Weak Bearish stocks is generally a prelude to a change in investor sentiment toward bullishness. The low reading of the Stock Trends Bull/Bear Ratio (0.3 on both exchanges) indicate that this may be the nadir of bearish sentiment. However, it is clear that U.S. stocks are offering more of an early glimpse at this optimism. Stock Trends subscribers should see more U.S. Picks of the Week stock picks if the market stabilizes.

Fording Canadian Coal stokes

Fording Canadian Coal Trust (TSX:FDG.UN) pounced to a new 52-week high today, jumping to a high of $44.33 before settling back into a 7% gain in mid afternoon trading ($42.74). The positive pop and robust trading volume brings the 35-week Bullish trend back in order.

TransAlta support?

Holders of TSX-listed utility TransAlta (TSX:TA) have reason enough to be disgruntled. The stock has now dropped to the $30 level from its $34 perch, jeopardizing its bullish trend. Some institutional holders are calling for corporate streamlining and asset sales. The Stock Trends Weak Bullish alert last week certainly puts investors on call. But as the stock tests the current support level - the 40-week moving average trend line - traders might look for signals of strength. If TA holds and rebounds off the primary trend line, the stock should benefit from the broad market's turmoil.

Sino-Forest gumption

Canadian forestry stocks have been wet kindling for an eternity. Only TSX-listed Sino-Forest Corp. (TSX:TRE), with its timber harvests in China, has been in our good trend books. The stock has been trending positively since November of 2006 when it first entered the Stock Trends filters as a Pick of the Week at $6.88. Its Bullish trend elevated it to a peak of $26.15 last autumn. TRE faltered in November and amid the January market collapse it has been driven back to its primary trend line (40-week MA). With last week's 11% drop TRE turned Stock Trends Weak Bullish, but it could be in a position to recover from the brutal slip earlier this week when TRE dropped to a low of $15.11 on Tuesday. Today's advance of 4.3% on moderate volume brings the current price back to $18.50. We'll have to see if the stock can gain some traction on the slippery market slopes, but this is a materials stock investors need not give up on yet. A further advance to above $21 will reassure shareholders and help buoy TRE in these troubled waters.

U.S REITs? It's alive!

As expected, it was a wild and woolly ride today. Hope for the financial sector appears in the offing, but do not be fooled by this rally. The gyrations of a bear market have tempted even the steadfast trader. The extreme movements in financials and materials stocks embodies the clash of will among monetary forces. Despite today's adventure, stick with commodities and defensive sectors.

However, the market is looking for signs of a bottom. Stock Trends offers little help with such fortune-telling. It can serve up a storyline as it unfolds, though. One of the recent Stock Trends NYSE Picks of the Week is Anworth Mortgage Asset Co (NYSE:ANH), a real estate investment trust that has developed price momentum over the past 13-weeks. The appearance of this California-based REIT, and its inherent assets - those mortgage-backed securities left for dead meat - in the Stock Trends filters gives us encouraging indications about the prospect for more stable housing and credit markets going forward. ANH will be a Stock Trends Bullish Crossover this week, its steadily building secondary trend is pushing the stock toward its May 07 high of $10.06. Every bit of financial market news that shows that ANH is still good paper is helping. Things must be improving - the company is proceeding with an 11-million share offering. The stock closed at $9.10 today. We will see what kind of appetite the market now has for this soured, but revived asset class.

Viva Vivus!

Of the number of health care stocks that have been recent Stock Trends picks, Vivus Inc.(NASDAQ:VVUS) stayed firm in the market volatility. VVUS first came to our attention in the January 11 Picks of the Week when it closed at $5.61. It had a Stock Trends Bullish Crossover last week. Today it hit a high of $6.25 before closing at $6.18. The eclipse of the stock's previous high attained last August could help propel VVUS in a very difficult stock market. It appears there will be no dysfunction in this stock, recession or not.

Materials sector still noble

Investors looking for direction in the current market disarray should review the sector trend strengths evident in the exchange traded funds reports posted at Stock Trends. The relative strength of materials stocks, despite the haircut the sector has suffered in recent sessions, is still a steady railing. Toronto Stock Exchange listed funds that stand out currently include Claymore Global Agriculture Fund (TSX:COW), iShares COMEX Gold Fund (TSX:IGT), Horizons BetaPro Global Gold Bull Plus Fund (TSX:HGU), iShares S&P/TSX Global Gold Fund (TSX:XGD), and the iShares S&P/TSX Materials Fund (TSX:XMA). Look for a rebound in these funds as equity markets stabilize. XMA recovered 6.7% today to close at $36.48, sitting perhaps not coincidentally at the ETF's 13-week moving average trend line. Volatility has made this a rough ride, but sticking with the commodity play should be rewarding.

Hope for 2008

The emerging bear market of 2008 comes after a less than gratifying year for the Stock Trends TSX Portfolio. The trend conditions in 2007 never really favoured the trading strategy. Indeed, the number of portfolio buys totaled 15, half the average yearly number of buys. The return on average invested capital was an uninspiring 10.2%, better than the 7.1% the S&P/TSX Composite Index logged in 2007, but well below the 42% average return on invested capital measured over the 14 complete years the trading strategy has been active. If there is an appetizing morsel to nibble on, it may be the outstanding performance of the Stock Trends TSX Portfolio in the last market downturn. The results of 2002 - an impressive return of 62% for the ST Portfolio versus a 13% drop in the S&P/TSX Composite Index - reveal that the trend apparatus of Stock Trends can produce trading profits in a grizzly market. It is a matter of being in the right place at the right time. For now we must wait for investor sentiment to turn, an event that will be represented by a rising level of Weak Bearish () stocks. With only 7% of TSX stocks currently in a Weak Bearish trend, we know that patience is in full order. Until the level of Weak Bearish stocks increases the Stock Trends TSX Portfolio will be in hibernation with the bears.

POT, AGU served

Although the S&P/TSX Composite Index has dropped below another price level support and is a currently in a Stock Trends Bearish category, today's big hit on blue chip momentum leaders Potash Corp (TSX:POT) and Agrium (TSX:AGU) may prove to be another great opportunity for traders to pick up these Bullish stocks.

POT has dropped 10% and is now trading ($124) above a support level it touched in earlier trading. AGU similarly sits above its support level represented by its 13-week MA ($60). The global agriculture-chemical boom will not be swayed by the forces working against North American equity markets - the bullish trend of stocks like POT and AGU should give positive guidance for traders ready to pick up these stocks at the support levels touched today.

Healthcare Service Group

Defensive investors have taken to the health care sector again. The Stock Trends Picks of the Week reports have been active with U.S. health care stocks over recent weeks. Top among the year-to-date performers are medical supplies stocks - up 5.4%, second only to the YTD performance of gold stocks. Less glamorous suppliers like Healthcare Services Group (NASDAQ:HCSG), a supplier of linen, maintenance and food services to nursing homes and hospitals, is a worthy trend moving stock. HCSG ranks as the longest running bullish stock on the NASDAQ, clocking in 241 weeks as a Stock Trends Bullish stock. It has been trading in a range over the past two quarters, but today's move to $24 could tip investors to a new bullish move. Look for a buy signal if the stock scales its 52-week high, $24.45.