March 31, 2004...nothing of major significance occurred on the last day of the month.  On the positive side, stocks with a high "high-close" differential fared well, followed by oils and recent losers.

On the negative side, stocks with a low number of institutional holders, recent gains, or high volatility were weak.  Tech stocks were weak.

Today's market offers few clues as to tomorrow's market.  However, the first day of a month has been the most positive on a historical basis.  We've noted that bottom-fishing tends to work well at the beginnings of months.

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Here's a link on the "sell in May" strategy.  The gyst of the article is that the philosophy may not work particularly well in election years, where the Dow has averaged better than 5% gains from May through October.  Congratulations to Mark Hulbert, the writer, who actually noted that this election year trend is not significant at a 95% confidence level...rarity of rarities in the popular financial press!

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Our data for the month of March is in.  Our own non-weighted sampling of the market showed fractional gains for the month (up about .25%).

Nothing stood out in terms of winning groups.  Finance, retail, and entertainment stocks were relatively strong...up 2-4%.  Fundamentally strong stocks (as measured by PE ratio) outperformed, as well as those with a strong March history.

Oils, our "classic" March industry group, marginally outperformed the general market...up about 1.3%.

Things were a bit more pronounced on the losing side...stocks of high volatility lost nearly 4%.  Tech stocks in general were weak.  

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Data for the second half of the month was interesting.  To your webmaster, the market had a meandering, pointless feel in this time period, but the data shows that a number of groups made decent, if quiet, moves during the period.  Most prominently, yearlong gainers were strong, up about 5%.  Volatile stocks were strong, though hi-tech industries weren't featured in our tables.  Stocks with good momentum in the middle of the month continued to gain.  Retails were strong, particularly after risk-adjustment.

We have the period as being up about 1.8%.  That may seem odd to those who watch the popular indices, but remember that our sampling of more than 2000 stocks is unweighted, unlike most of the indices.

On the losing side, non-volatiles were weak.  Yearlong losers just managed to hold ground.  Stocks with low current ratios (current assets divided by current liabilities) got hurt.

Matching this period to historic March second halves is rather difficult...the behavior of stocks this time was not at all typical.  March of 2001 might be the best match.  For what it's worth, April of 2001 was a very strong period, with mouth-watering gains (40%+) in 3 month and 1 month losers, and volatile stocks in general.  Weak stocks included those with strong March finishes, REIT's, regional banks, and non-volatiles in general.

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Our data for the first quarter is in.  Our non-weighted sampling of more than 2000 stocks showed gains of about 5%.  The popular, weighted indices were generally flat to negative for the quarter.  The S&P500 was up about 1%, and the Russell 3000 up closer to 2%.  The unweighted Value Line Industrial Index was up around 7%.  Unfortunately, investors generally take cues as to the market's overall health from non-diverse indices like the Dow and Nasdaq.

The strongest trend we observed was for December losers to rebound.  Going with stocks with the 10% weakest 20 day moving averages at the end of December resulted in 10% gains for the quarter.  You could stretch that to 12% by being even more selective.  Stocks with big losses on the last day of the year were also up around 10%.  We've seen this sort of behavior many times before...big losses near the end of a month, quarter, or year serving as strong indicators of future gains.

Retails in general were strong.

On a risk-adjusted basis, going with banks was a strong strategy.

Our "classic" quarterly strategy, that of choosing cheap stocks, produced gains around 6.5% with the data divided into deciles.  It's worthwhile to note that this group actually had considerably higher gains than this after just the first two weeks of January.  Also, note that the group of December losers, our best performers for the quarter, didn't come roaring out of the gates for the start of January...the gains manifested later.

On the losing side, about the worst you could have done was to put your money in semiconductors, with losses around 1.5%.  Naturally, the group was also quite weak on a risk-adjusted basis.  Though not particularly significant, volatile stocks in general were a bad play, as well as those that finished December strongly.  Combining a stock price well above prominent resistance levels with bad fundamentals (as measured by earnings) resulted in 3% losses.

March 30...our strongest group today was cheaply priced stocks, gaining better than 2%.  This was followed by oils, stocks with recent losses, and stocks trading well above the most prominent resistance levels.

On the losing side, stocks with low institutional ownership were weak, followed by stocks with high insider holdings, recent gains, high capitalization, and banks.

The data doesn't give much of a clue as to tomorrow's market.

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Here's an interesting link:  www.seasonalcharts.com .  There's plenty of fodder for thought and discussion, but our eyes were initially drawn to a seasonal chart displaying the Nasdaq performance over 33 years.  The surprise for us was a tendency for a nice spike from the beginning of July to the middle.  This tendency must have been particularly strong 15-33 years ago, because we don't see it in our own shorter-term data.

Another surprise, drawn from a seasonal chart of the Dow since 1896 (!):  historically, there has been a tendency for the market to make nice gains between late May and early August.  In recent years, this period has been quite flat.

Finally, we note the seasonal volatility charts on the site. It would appear that there's a decent tendency for volatility to peak on three month cycles...at the end of January, April, July, and October.  That's based on eyeballing the NASDAQ charts, not statistics.  On larger cap indices, the July peak doesn't manifest.

The site seems to be primarily intended for a German audience, but there is some English.

March 29...nice bullishness, with volatiles leading the pack upwards, and non-volatiles resisting.

Outside volatility, positive groups included those with a high "high-close" differential, 3 month losers, and those with negative profit margins...it appears investors were nibbling at "junky" stocks.

On the lagging side, REIT's were weak.  Dividend-paying stocks in general were weak.

The strength in volatile stocks suggests further positivity tomorrow.

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Here's a link to a page that breaks down days of the week and days of the month in terms of historic percentage gains.  The only thing that stands out (for me) is the big historical gains on the first day of the month...about 0.25%.  That may not seem like much, but the next best day (the 11th trading day) averages a mere 0.17%.

I won't claim to understand why the gains are so large...my guess is it relates to institutions shifting into more volatile stocks once the "window-dressing" period ends.

March 26...on the positive side, we have yearlong gainers, recent losers, and, rather oddly (given decent significance), stocks that fared well on this day last year.

Losers included REIT's and biotechs, and dividend paying stocks.  Those three groups have had a decent March...looks like some profit-taking. Yesterday's big gainers lost.

The tone for Monday is neutral...we won't venture a guess.

March 25...very nice gains, although the 3% Nasdaq index gain was a tad deceptive...broader indices showed gains closer to 2%.

On the positive side, mid-term losers topped the list.  Stocks with 100 day moving averages that were particularly low gained over 5% today, and three month losers weren't far behind.  Volatile stocks, semiconductors, and Monday's losers (hmmm...there's Monday again, leaving its mark on the market) followed.

On the trailing side were non-volatiles, gaining a tad over .5%.  Oils, expensive stocks, and recent winners were also weak.

The tone for tomorrow is definitely bullish...a 60% chance for an up market.

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Did we have any indication that today's market was around the corner?  It doesn't feel that way.  For what it's worth, we can remember that today's market followed a couple of sessions where volatility was a non-factor in the biggest gains and losses.  This is a tad odd.  

Another oddity was the degree to which semiconductors dominated the pack yesterday, and oils dominated the loss column...the second best/worst groups weren't even close.

There's always the danger of "seeing too much", of course.  But it's useful to remember these patterns for the sake of testing...we'll see what happens the next time this sort of trading emerges. 

March 24...a second day in a row of "non-conventional" trading.  By that, we mean that volatility didn't seem to play much role in which groups prospered and which groups suffered.

The stars of the show today were industry groups.  On the positive side, semiconductors and software were quite strong, with gains around 1.5%.  This outdistances our second best group by a full percentage point!  Mid-term losers outperformed.

On the negative side, oils were weak, losing better than 2%...again, outdistancing the second worst group by nearly 1%.  Cheap stocks were weak.

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On February 21, we discussed the concept of "market leaders" and the possibility of quantifying a stock as a "leader".

We've added an indicator that attempts to identify leaders.  We call the indicator "leadership".  The idea is if a leader goes up/down on day 1, other stocks should tend to go up/down on day 2...if this behavior plays out, you give a positive score (the absolute value of the total gain or loss that was predicted) to the stock in question.  If not, a negative score.  You look at this sort of behavior over a certain period of time with a large number of "reference" stocks (those for which the prospective "leader" is trying to make a prediction) and output a number.

The number we output is adjusted for volatility.  In other words, a non-volatile stock that does a good job of making predictions gets a higher score than a volatile stock that also does a good job.  In general, volatile stocks tend to do a good job of predicting market moves...we want to see if we can identify "leaders" regardless of volatility.

Another view of "leadership" is to simply identify stocks that have performed particularly well over a certain period of time (in the parlance of some, a high "relative strength"), regardless of whether the market "follows" per se. Obviously, it's easy to check for this sort of leadership in our data files...just sort the files via "yeargain" or "3monthgain" or whatever. 

Obviously, there are a lot of variations on this indicator.  You could use it to focus on prediction of stocks within the leader's industry only.  You could experiment with different time frames.  You can de-adjust for volatility.  For the moment, we'll leave the indicator as it is.  If it finds its way into our tables with any frequency, we'll consider tinkering with it more.

Note that a negative "leadership" score doesn't necessarily mean a stock is a "follower".  It means that if the stock goes down, the other stocks tend to go up.  This, in a sense, is also a sort of "leadership".  Stocks that find themselves in the mid-range of our "leadership" scores are simply those that don't seem to predict tomorrow's market with any "force".  

So, what stocks are currently good "leaders" when looking at a prediction of tomorrow's market (as opposed to the direction of the market in the next month)?  We've got "BE Aerospace" at the top of the list, followed by "Ixys Corp" and "Abercrombie and Fitch".  Microsoft is a weak (middle of the pack) leader, but Intel is rather strong.  Of the big name stocks, SBC Communications is probably the best leader.  Coca Cola gets a big negative rating...a strong performance tends to signal general losses in the bulk of stocks in the next market.

Another possibility for the future would be to make a "market leaders" index of sorts and test whether overall gains in the group of strongly positive leaders or losses in the group of strongly negative leaders would tend to do a decent job of predicting tomorrow's market or not.  For what it's worth, we note that our 20 most positive leaders yesterday gained an average of 1.5%, while the negative leaders gained a paltry 0.15%.

Having said all this, we have no idea whether the leadership indicator has any worth at all.  Only time will tell.

March 23...sort of a respite in the recent action, given the fact that neither volatiles or non-volatiles were featured in our tables today.  Instead, there seemed to be an emphasis on bottom fishing, with yesterday's losers gaining 1.5% or more.  Small caps fared well.  Stocks with large numbers of institutional holders were strong.

On the negative side, oils were weak.  Large-caps fared poorly.

Today's action really doesn't say much about tomorrow's market, so we'll refrain from offering a guess.

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For some fun, check out this link:  http://www.thestreet.com/comment/wrongrear/883176.html .  Jim Cramer explaining why "momentum investing" is more potent than "value investing"...back in 2000, at the height of the tech bubble.  From that time to the current time, tech stocks lost around 66% of their value, while the dowdy components of the Dow lost around 15%.  

I'm surprised that link hasn't been removed!

Obviously, our own website has appeal to some of the more speculative of investors.  We're not exactly pushing "buy and hold for 20 years" strategies.  Still, the propensity of certain analysts to berate Warren Buffett (as occurs in the above article) seems awfully strange to us.  Aren't your investment-derived percentage gains really the litmus test of your investment philosophy?

Oh well.  Every crackpot physicist has to take a swipe at Albert Einstein.

March 22...strong bearishness, with volatile stocks leading the losers down as much as 3.7%, and non-volatiles resisting losses.  Other groups that resisted losses include REIT's, dividend-payers, and stocks with strong profit-margins.  Other losers included cheap stocks, and yearlong and monthlong gainers.

The above conditions signal a good probability that tomorrow will continue the negativity.  The main glint of hope for a reversal would be the fact that the conditions today appeared to be related to political events (the killing of the Hamas leader), as opposed to economic events.

March 19...more negativity.  Unlike last Friday's downward action, the indicators tend to signal further negativity Monday.  Of course, it's all hugely dependent on politics and factors beyond the scope of the indicators...we just hope to be right a bit more often than chance.

On the losing side, Monday's losers were weak again.  This group got punished on Thursday as well...whoever owns this particular bag of stocks is really feeling some pain of late.  Semiconductors and volatile stocks were weak, but particularly notable were the losses in relatively dowdy transportation-related stocks.  Yesterday's big gainers were weak.

Entertainment stocks were positive today.  REIT's and metals and mining fared well.  Monday's gainers outperformed.  

We've noticed this sort of emphasis on Monday's winners and losers before...maybe we're seeing too much, but it would be worthwhile to bear this in mind.

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Today was "quadruple" witching hour, so naturally we see the requisite reports of a "volatile" session.  And once again, we don't see much evidence for excess volatility on this day of the month.  Perhaps it's true on an intra-day level.

March 18...negativity, with REIT's, oils, and dividend-paying stocks bucking the trend. Non-volatiles lost only a tad.  Expensive stocks in general resisted losses well.

On the negative side of our tables, stocks with nice gains yesterday reversed to the tune of nearly 2%.  Those with a series of recent losses were also weak.  Semiconductors got hurt.  The most volatile group of stocks actually avoided our "worst performers" table.

Mar 17...Nice positivity.  Recent losers of every shade were featured as winners...Monday's and Tuesday's losers, monthlong losers, those with low short-term moving averages, etc.  Some of the groups gained over 3%.  Volatile stocks were strong.

None of our groups actually lost money.  Relatively weak groups included non-volatiles and recent winners.

Note that no industry groups made our tables today.  The real action was elsewhere.

Given today's behavior, odds are good (around 60%) for another positive session tomorrow.  In addition to our own data, note that both the VIX (volatility) and FVX (treasury bill yield) indices lost ground today...good signs.

Mar 16...One of the murkier sessions we've seen this year...separation between best and worst performing groups was only about 2%, and nothing of particular significance emerged.

It seems there was an emphasis on fundamentals today, with stocks of low P/E ratios, strong book value, and moderate debt/equity emerging as our best groups.  On the negative side, volatile stocks were weak.  Cheap stocks suffered a bit.

The above trends would suggest a weak market tomorrow, though again, they don't exactly overwhelm us with their significance.

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Here's a link that details the best industries to buy, month by month.  We're happy to say, with few exceptions, the list parallels our own.  We're a bit puzzled by the inclusion of semiconductors and high-tech in general in December, though.

Mar 15...A strongly negative session, supposedly spurred by fears that Al Quaeda was behind the Spain train bombings.  Seems just a tad far-fetched to place so much blame on the Spanish event...Friday's post-bombing market was quite strong.  Now, people are suddenly waking up and thinking, "Maybe Al Quaeda did it" and driving the market down 2%.

Oil stocks held up best in this negativity, followed by non-volatiles, dividend-payers, expensive stocks, and stocks with low P/E ratios.  On the negative side, volatile stocks, stocks with big gains on Friday, stocks with weak fundamentals, and cheap stocks all got burned to the tune of 4% or more.

Mar 13 (Sat)...Our data for the first half of March is in.  Our unweighted sampling of the general market showed about a 1% loss.

The best performer...REIT's, gaining around 2%.  Naturally, this dowdy group was particularly strong after risk-adjustment.

On the losing side, semiconductors dominated, with losses around 4.5%.  Large-caps in general were weak, especially after risk-adjustment.

Off our tables, biotechs outperformed.  We mention this because they performed well last year, but have a longer-term historical tendency towards weakness.  It seems that last year's behavior prevailed.

Another industry worth mentioning would be oils, since they've traditionally outperformed quite nicely at this time of year.  They did it again, though not in a mind-boggling way...up a tad under 1% over the two weeks.

Mar 12...OK, a nice reversal.  Buying the 200 or so stocks with yesterday's highest "high - close" differential netted gains better than 4%, and you could have tacked on another 1% by being even more selective.  Other strong groups included volatile stocks in general and recent losers.  Stocks with losses 3 or 4 days ago were featured...worth noting since that was the beginning of this week's unpleasant losing streak.  We'll keep this in mind the next time we see a continued losing streak.

Another observation worth remembering is that stocks with a large number of institutional holders held up well in yesterday's session...it appears that these guys were entering the market and lending "support" to certain stocks.

Relatively weak groups were confined to non-volatile stocks, and those that finished yesterday's session near their highs.

Interesting to note that not a single industry group found its way into our tables today.

The probabilities lie with another positive session on Monday, with an emphasis on bottom-fishing.

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Investor's Business Daily has an article on the habits of the "biggest stock winners of all time" prior to their breakouts.  Given the near-religious adherence to the momentum investing style that it espouses, we shouldn't be surprised that the 60 stocks that were examined exhibited a "relative strength" better than 83% of the other stocks (i.e.. they had already outperformed 83% of the other stocks out there...presumably on a yearlong scale) at the time of the breakout.

The odd thing was the criteria for inclusion in the "biggest stock winners of all time" list.  Motorola, which showed a 224% gain in the 1965-1966 period was included amongst the 60 stocks.  Coca-Cola showed the same 224% gain in 1994-1997.  Price Club showed a 322% gain in 1982-83.  These are nice gains, but do they really qualify to be placed on a list of the 60 "biggest stock winners of all time"?  If you had simply purchased a basket of the cheapest 4% of Russell 3000 stocks in January 2003, you'd have beaten the gains exhibited by some of these "superwinners".

Point is, it feels as if these stocks are being pre-selected to produce the results that IBD desires.

Mar 11...Most indices were down about 1%.  However, we broke out of the "textbook" negativity that we had seen over the previous 3 trading sessions, giving hope that tomorrow could see a reversal.  

The focus today was not on volatile vs. non-volatile stocks.  Instead, we saw stocks of low marketcap, and large institutional ownership hold ground.  Yesterday's big losers, as well as 3 month losers, resisted losses relatively well.  Metals held up well.  Semiconductors were surprisingly strong for such a negative market.

On the negative side, long term gainers lost.  Despite relative strength in semiconductors, volatile stocks in general did have larger losses than the market itself.

We've noted that the Nasdaq has about a 60% tendency to turn around following losing streaks of 4 days or longer.  Combine this statistic with the focus away from volatility, and the relative strength in computer stocks, and we'd say there's a better than average chance that tomorrow could see a reversal.

Mar 10...More bearishness, strongly resembling yesterday's pattern...volatiles got hurt, non-volatiles resisted, and finance-related stocks hung tough.  Cheap stocks lost.

Also included in the losing category were yearlong winners and stocks with weak fundamentals.  Stocks that lost yesterday continued to lose, while stocks that closed near their highs yesterday resisted losses well...a hint of negative momentum.

Tomorrow's market should be interesting...the indicators point toward more negativity, but we've seen this sort of behavior for several days running.

Mar 9...Bearishness, with non-volatiles resisting losses and volatiles faring worst.  Finance-related stocks held up well.  Computer stocks, cheap stocks, fundamentally weak stocks, and those that gained nicely on this day one year ago lost 2% or better.

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Today, we tinkered with predicting the performance of the tomorrow's Nasdaq composite index.  We took several indices and used their one-day historical performances as a basis for prediction.  The indices were the FVX (a treasury bill index), the XCI (computers), XAU (gold), XII (institutional buying), VIX (volatility), IXI (industrial), and VLIU (utilities).  The Nasdaq composite itself goes by "IXQ".  The test goes back to October of 1990...3300 lines of data.

Perhaps we shouldn't be surprised that nothing amazingly significant emerged...it's in these domains that the "efficient market hypothesis" would function most strongly.  Nevertheless, there were a number of trends that beat throwing the dice by a decent margin.

A gain in the XCI index was the strongest indicator of a future gain in the IXQ.  Breaking the data up into deciles of XCI gains caused a loss in significance.  There was about a 10% chance that the result was pure luck.  We're not hugely surprised that this indicator would serve as a decent indicator of tomorrow's performance...we've noted quite a few times that gains in volatile stocks tends to be a short-term bullish signal..

If the IXI falls into the lowest 1/3 of % gains (historically, a loss between 10% and .03%), the market tends to fall the next day.

The VXI, a popular index for traders, did have a slight tendency to forecast up days when its daily change was negative.  Combining this negative reading with a gain in the XCI improved the gains further, without losing significance.  This dual strategy, however, was slightly outperformed by that of combining an XCI gain with an FVX loss.

You can view several tables showing the results of our test here. 

To repeat:  nothing amazing emerged.  The most interesting results occurred with large "slices" of data (e.g. when the VIX was simply divided into two performance groups)...don't assume you could milk the market for greater gains by, say, buying stocks when the VIX falls into the lowest 10% decile group.

Mar 8...for the first time in a while, we got a decent spread between our top and bottom groups...about 4%.  Making a rare appearance at the top were entertainment stocks, casinos, hotels, the movie industry, etc.  These stocks were followed by those of low volatility, and a host of not-so-significant fundamental indicators.

On the losing side, semiconductors got burned to a tune of better than 3%.  This could reverse tomorrow on the heels of Texas Instrument's strong after-hours earnings report..we'll see.  Volatile stocks were hurt, as well as those on a recent losing streak. 

Normally, such conditions favor continued bearishness, but the TI announcement could temper that.

Mar 7 (Sun)...For a bit of fun, go to Yahoo and type something along the lines of "2003 Market Forecast".  You'll get a long list of relevant pages (2.5 million pages when we tried!), with some very prominent talking heads telling you what would happen in 2003.  It feels like more than 50% of these guys were wrong, especially when you consider that some of these pages were certainly altered retrospectively (you can sometimes check the data of alteration by choosing File->Properties on your browser).

Some of the pages we checked had very elaborate analysis, historic charts, obscure indicators...you name it.  Amazing the detail that goes into predicting something as fuzzy as long-term market behavior.

In general, the feeling we got from the "2003 Market Forecasts" was one of negativity.  After all is said and done, and the Bollinger bands, trend lines, and moving averages have been drawn in, it seems like these predictions have more to do with the personal psychology of the analyst than anything else. 

Of course, when these guys do get it right, you'll never hear the end of it.

The very first hit we got was for a site that combines astrology and stock market prediction.  We're about as skeptical as can be on this subject, but it wouldn't be difficult for us to find correlations with planetary motion and stock market behavior.  You could say, "buy yearlong losers when the sun is in Capricorn".  Or, you could say, "buy yearlong losers in January".  Note also that Mercury makes about one orbit around the sun per quarter (88 days, actually), so an intrepid astrologer/data-snooper ought to be able to find something interesting there.  Since the earth is also traveling around the sun, though, the time it takes for planets to return to the same position (with respect to the earth) also varies in a periodic way.  The myriad conjunctions and oppositions of various planets also occur at predictable intervals.  Sunspots operate on an 11 year cycle.  The possibilities for finding correlations are nearly unlimited!

In terms of profits, "buy losers in January" performs no better than "buy losers when the sun is in Capricorn".  So what's the difference?  Primarily, the first rule allows you to test and make certain predictions...if tax loss selling is implicated in January gains, shouldn't we expect something of a similar nature at the beginnings of quarters?

By the way, why do these astrologers pay so much attention to Pluto?  The planet wasn't even discovered until 1930!  Now some scientists question if maybe it isn't more like a large asteroid than a planet.  Searching the net, there are a few astrologers who pay attention to asteroids.  We dug this up regarding Ceres, one of the largest asteroids: 

Ceres also governs food complexes, as indicated by Ceres' refusal to eat; withdrawal of support; and work stoppages, as she halted food production as a means of control. Therefore Ceres rules eating disorders.

Hmmm...suppose that scientists suddenly decided to rename this asteroid...what would happen then?  Digging through the internet, the scientist (Guiseppe Piazzi) who discovered Ceres in 1801 actually named it "Ceres Ferdinandea", with the "Ferdinandea" relating to Piazzi's royal patron.  Ceres is the patron goddess of Sicily, so the name likely reflects some warm, possibly patriotic, feelings for Piazzi's motherland. 

And hey, each of these asteroids has a numerical designation...shouldn't we be paying some attention to that?

Truly amazing...first you've got a Greek/Roman myth about the goddess Ceres, who apparently refused to eat.  Then you get a scientist in Italy 200 years ago who decides to name an asteroid based on Sicilian custom.  Then you conclude that this asteroid must "govern" eating disorders.

Always an eating disorder with these folks.

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In the past, we've made comments regarding the disadvantages of "weighted" market indices.  Here's a link on the subject:  http://www.decisionpoint.com/Glossary/Unweighted.html .

The article makes some interesting observations.  About 70% of the S&P 500's weighting is in 50 (10%) of the index's stocks.  Despite the "500" moniker, the index really doesn't serve an individual investor who gives equal weight to each stock he buys. Weighting gives some idea of a country's economic strength, but doesn't necessarily serve the individual stock investor.

Almost all of the indices out there are weighted.  The author constructs an unweighted approximation of the S&P 500 and finds it has outperformed the S&P 500 considerably over the last 13 years.  The performance was particularly strong relative to the weighted index from the year 2000 to the present, while the unweighted index was relatively weak in the mid to late 90's...the author reasons that this was the period when "indexing", the purchase of index funds, became popular, so money became concentrated in stocks with a heavy weighting during this period.  

It's interesting to speculate on what the effects of the mass public investing heavily in these sorts of weighted indices are and could be in the future.  Taken to an extreme, of course, small caps get entirely ignored in this investment environment.

Here's a link to some "equal-weighted" indices... http://finance.yahoo.com/l?s=ewi&t=I&m=US .  Value Line has one, as well as Zweig.

March 5...the indices were flat, and so were our tables...less than a 2% spread between best and worst groups.

Probably the most interesting trend today was for stocks that gained nicely on this day last year to lose today.  We have no idea what it means, if anything.

In the absence of any strong trading winds, fundamental data came to the fore.  Yesterday's tendency for junky stocks (via high or negative pe's and low profit margins) to prosper reversed...low PE and high profit margin stocks did well.  Expensive stocks did well, as well as stocks with decent recent gains.

On the losing side, cheap stocks, semiconductors, and yesterday's winners were all weak.

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Based on yesterday's tables, we predicted a positive market for today.  Instead, the market was flat.  One could guess that a number of economic announcements derailed the positivity.  We're not sure.  In any case, we're only trying to swing the probabilities our way...we have no expectation of being right a hell of a lot more often than chance would dictate.  Hopefully, though, often enough to profit beyond the market averages.

March 4...decent bullishness today...volatile stocks were strong, non-volatiles weak.  Stocks with fat or non-existent p/e ratios were strong...some folks were experimenting with "junky" stocks today.  Semiconductors were strong.  Cheap stocks and recent losers fared well.

On the losing side, stocks with decent fundamentals (as measured by current ratio, quick ratio, and profit margin) were weak.  It's not significant, but stocks with low numbers of institutional holders were weak.

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We won't bother to provide the link, but today's Yahoo Finance has trading advice from Investor's Business Daily.  The idea is that the biggest drop in a stock since a breakout can signal a meltdown.  Ignoring the fact that the first drop since the breakout is the biggest drop since the breakout, it's amazing to me that only one example of such behavior is provided.  We're supposed to look at one chart, analyze it with a magnifying glass, draw in all the resistance, support, moving averages, Bollinger bands (whatever), and then believe that this behavior is likely to repeat with other stocks.  Extraordinarily unscientific.  

These are the same folks who scoff at the use of historical data...but isn't this historical data gone haywire...projecting one historical example onto the entire market?  I suppose that the fact that we're looking at a chart, as opposed to numbers, means it's not "data", and thus is immune to the usual criticisms of historical analysis.

March 3...Biotechs were strong, semiconductors weak...a reversal of the usual pattern in the first half of a month.  Biotechs are an interesting group to watch at this time of year...the general history of the group is quite poor in March, but last year was an exception.  How will things play out this time around?

Outside of the losses in semiconductors, nothing horribly significant emerged today.  Recent losers made a comeback.  Stocks with nice longterm gains suffered.  Volatile stocks were weak.

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Continuing with yesterday's discussion on cheap stocks, we dug this article up:  http://moneycentral.msn.com/content/P71375.asp .  The author lists a number of indicators to gauge cheap stocks.  We thought we'd add one that he forgot:  price.

OK, that was a bit of a joke.  We fully understand that "cheap" can take different meanings in the stock market.  But if you want some real rubbish,  check this out. Apparently, Investors Business Daily's "main" stock tables won't even list stocks trading under $10 because they don't meet the "CAN SLIM" criteria, whatever that is.  The article goes on to warn against buying stocks "in the basement", "go for quality, not quantity", "great stocks trade at a premium", that you've got to have the institutions "on your side" (and thus shouldn't buy cheap stocks that the institutions can't), that buying cheap stocks is faddish, and on and on.  Personally, I have good memories of the basement...that's where the ping-pong table was.

Buy the stocks that the institutions have already bought...if I were a bit more conspiratorial, I'd say that some of the advice you get is intended precisely to allow brokerages and institutions to profit at your expense.

In fairness, IBD is largely for short-term traders, and cheap stocks usually aren't the best choices for day trades.  But the blanket dismissal of cheap stocks is ludicrous..look below for more evidence of the profits to be gotten through cheap stocks.  We shouldn't complain too much, though...the misunderstandings that float around the financial media create vacuums of inefficiency for you and I.

March 2...a negative market, with non-volatiles faring best, and volatiles worst.  This pattern tips the scales toward more negativity tomorrow.

Though not horribly significant, stocks with nice volume increases of late fared well.  REIT's were positive.

Cheap stocks were weak.  Yearlong gainers suffered.

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One recurring theme on this site is the advantage of simply buying cheap stocks culled from the Russell 3000.  The effect occurs on a time scale of anywhere from one day to a full year..  It's often so strong that we wonder if maybe we've built in some kind of error or oversight in our algorithms.

We've written our programs so that stocks that trade below $.50 during the period of time we examine get removed from our data.  Stocks that begin above $.50 and go below this figure get removed, but then so do stocks that begin below this figure and go up.  We're not so naive to think that the two groups simply negate each other, but it's hard to believe that our cut-off price makes a tremendous difference.  Note also that it's often the case that the second and even third cheapest groups often find themselves in our winning groups tables.

We do adjust for splits.  Whereas a stock's "real" price may have been $100 last year, if it split 2:1 between now and then, we record the stock's price last year as $50.  In other words, whenever a stock splits, the entire data file associated with that stock gets adjusted, line by line.  Thus, a particularly successful stock that has undergone a series of splits over the last 10 or so years might have a very cheap stock price 10 years ago, at least as far as our data files are concerned.

In the future, we can do some experiments to determine what role, if any,  the above procedure has in biasing the data.  Our guess...not much.  Note that we're not predicting 10 year gains in our tables.  The maximal period we look at is 1 year.  One of the most significant trends we've identified is that for cheap stocks to prosper in the first couple weeks of January.  On several occasions your webmaster used real money to take advantage of the effect, with very nice success...no illusion there! 

Cheap stocks performed extremely well in 2003...I opened a data file generated at the beginning of 2003 (not in retrospect, where split-adjustments might be applied) and looked at the cheapest 100 stocks (out of more than 2000) individually to see if the 200% gains connected to this group were somehow "artificial" (e.g. we missed a few reverse splits).  But the gains were absolutely real.

Nevertheless, it would be worthwhile to examine stocks that we list as "cheap" as a result of splits versus stocks that are "naturally" cheap.  In fact, there are a number of studies that show that stocks that have split do indeed outperform the market in general.  One showed that stocks that have split have historically outperformed by an average of 5% per year...quite significant when most indices have gained an average of about 11%/year over their lifetimes.  The effect can be raised to 11% if the split is accompanied by an upward earnings revision.

Another study showed average gains of 3% in the 5 days following a split.  The same study showed gains above the market averages of 8% in the first year, 9% in the second, and 12% in the third.

Another effect of particular relevance to option traders is the fact that volatility goes up considerably (around 35%) following a split.  In theory, it shouldn't.  In fact, the increase in volatility is maintained over the year following the split, with little subsidence.

Naturally, there's a lot of debate as to why the "post-split" effect is so strong.  The best explanation, as far as I'm concerned, is simply that good, solid, growing companies are in a position to split.

Note that if the positive effects of splits were largely responsible for the gains in cheaply priced stocks, the effect would diminish from, say, 10 years ago to the present.  Because of its many splits, Microsoft would be quite a cheap stock 10 years ago (by virtue of data adjustments) and so would be considered a "buy" at that time.  But no company splits from $100 to under $5, so stocks that traded cheaply in more recent times (say, the beginning of 2003) won't fall into our cheapest decile or 4% by virtue of stock splits.  Yet cheap stocks have shown a stronger-than-ever propensity to gain.  Again, witness 2003's tripling of value in the group...a gain that we examined with an archeologist's brush.

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Still more on cheap stocks...check out the following link:  http://moneycentral.msn.com/articles/invest/extra/6266.asp .  The idea, in case the link goes belly-up at some point in the future, is that the authors examined 491 stocks trading under $5 and compared them to the broader market.  The cheap stocks outperformed by an average of 10%.  More radically, though, the authors proceeded to group the cheap stocks according to ValueLine's rating system (a rank of "1" is best, "5" worst).  ValueLine didn't give a "1" rating to a single sub-$5 stock in this period, but the 30 stocks ranked "2" averaged 56% yearly gains.  Those ranked "3" averaged 28%.  Those ranked "4" averaged 13%, while those ranked "5" shot back up to 32%.

Note that all our own cheap stocks are drawn from the Russell 3000, which doesn't list micro-cap, "junky" stocks.  Chances are, if you referenced our cheap stocks against ValueLine, you'd find a disproportionate number of them with a #2 or #3 ranking.

Now, if you make 56% per year for 11 years, you walk away with a 133-fold gain.  Not bad.  Our own data shows that you get further advantages by going considerably below $5.00, so one can only imagine how much more radical the gains would be if the selection process were further restricted.

By the way, shame on ValueLine for excluding any stock under $5 from its #1 ranking.  These stocks are precisely the ones that make the most impressive gains.

March 1...The general market was quite strong, with most indices up around 1%.  Nevertheless, the gap between our best and worst performing groups wasn't particularly large...stocks seemed to move in lockstep.

Gainers were topped by those that lost on the last day of February...a recurring beginning-of-the-month theme.  Oils were strong.  Yearlong gainers were strong.

On the weak side, healthcare and medical devices were were found.  Non-volatiles were also weak...a slightly bullish sign for tomorrow.

Feb 29 (Sun)...We've got our data for the second half of February.  The period lost about 1%.

The best places to put your money...oils and retail, gaining about 2%.  Stocks with low PE ratios fared well.  

On the negative side, volatile stocks suffered to the tune of around 6%...we were rather surprised by the magnitude of this loss...it happened quite quietly in this 10 day period.  Semiconductors were weak.  Cheap stocks made a rare appearance on the losing side of our ledger...down around 4%.

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For those looking to match February 2004 with another historical February, seeking to learn how March might evolve, we'd look at February 2002.  March 2002, for what it's worth, was a strong month for yearlong losers, cheap stocks, volatile stocks, and semiconductors.

Feb 27...a very "confined" market...very little separation between our winningest and losingest groups.

Stocks trading near their highs performed well.  No particular industries stood out in the winning column, though software stocks underperformed.  As we've seen several times since we began incorporating, institional ownership data appears in our tables, with stocks of low ownership performing poorly this time around.  We'll look for more such data in months ahead before reaching any grand conclusions, though.

Stocks of high capitalization were generally weak, despite the fact that the Dow outperformed the Nasdaq.

No particular bullish or bearish bias is shown via our indicators for the next session.

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Our monthlong data is in.  Our own non-weighted sampling of Russell 3000 stocks shows the month up about 1.5%.  The Nasdaq, biased toward tech stocks, was down a tad for the month.

Retail, particularly apparel,  fared quite nicely...up better than 7%.  More broadly, it was a good month for somewhat dowdy stocks...retail, bulk manufacturing, supermarkets, etc.  Oils performed well.  Fundamentally solid stocks were strong...stocks with PE's in the lowest first, second, and third deciles all made our tables.

On the losing side, computer stocks were weak, losing as much as 5%.  Cheap stocks underperformed.  Volatile stocks were weak.

Off our tables, yearlong gainers slightly underperformed the market, while yearlong losers paralleled the market...the action this month was not to be found in these categories.

We'll report in with our half-monthly data tomorrow.  And we'll update our long-term February tables.

Feb 26...today's behavior raises the odds of a positive session tomorrow, with non-volatiles performing weakest.  Positive groups included recent and one month losers AND yearlong gainers.  Semiconductors rebounded.  

Other losing groups included those held by large numbers of institutions, financials, and those of low marketcap.

Feb 25...nice bullishness, with volatile stocks, semiconductors, and recent losers performing well.  On the negative side, non-volatile issues were weakest.  Broadcasting issues were a tad weak.  According to what we've written below, these combinations of indications bode well for the next session.

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Here is a link to a site with some stats on the issue of "what does the market do after X number of negative sessions?": http://www.brettsteenbarger.com/weblog.htm . Not that we're either surprised or impressed with the result...the market tends to go up after a streak of losses.

The author of the site wrote a book called "Psychology and the Stock Market". We find the site itself to be a mixed bag...unfounded assertions plus an occasional insight. The guy looks at events that have occured just a handful of times over the course of a certain time period, and then goes on to make deductions from them.

Worth checking out, though, if only once.

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Below, we repeat the same sort of experiment as on the 24th, but this time we ask how the market reacts if particular groups appear atop our "worst performing stocks" tables.  The table shows the most interesting results we could dig up.  To be clear...if the group shown in the table was the worst performing group in the market, the following average gains ensued in the general market in the next session.

Feb 24...Oils, metals, and mining stocks were relatively strong today.  Stocks held by large numbers of institutions fared well.  Those that finished near their lows on Monday were strong...a somewhat bearish indicator for the next session (see below).  Small caps were strong.

On the negative side, nothing of major significance to report.  Stocks that have taken losses over the last few months were weak.  Semiconductors sank.

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To continue on some of the discussion below, we asked which indicators in our daily tables best predict positive or negative sessions in the next market session.  The following tables show the market gains that have followed when the given indicator is the top predictor of today's gains...

A few indicators actually showed more radical average gains, but they didn't appear often enough at the top of our tables to justify consideration.  

All the indicators in the table appeared at least 30 times.  The "high-close" indicator was the single most frequent...it appears 306 times at the top of our daily tables.  In the end, it does not serve as a strong indicator of gains or losses for the next market.

The average gain for all indicators was about 0.077%/day.  

Regarding our previous discussions on highly-volatile stocks leading the market to further gains, it would seem more to the point to say that when non-volatile stocks appear on the top of our winning stocks tables, they tend to signal losses for the general market in the session ahead.

Feb 23...fairly strong negativity...volatile issues lost, non-volatiles actually eked out minor gains.  Dividend-paying stocks resisted losses.  

On the losing side, semiconductors were burned again.  Stocks with losses over the last month or three months were burned to a tune of about 3%.  Yearlong winners, however, were also weak.

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To finish off the discussion we started on the 21st, we found that the market rose 98 out of 157 times (62.4%) when the top 10% of stocks in our "stdev", "pstdev", or "vstdev" categories was the best performing group in the previous day.  This compares to a slight general tendency for the market to finish up (51.6% of the time since 1992).

There are a lot more variations on this sort of research...we'll be toying around with it in the weeks ahead.

Feb 21 (Sat)...in the financial press, you'll hear writers speak of market "leaders".  These are the stocks that first make their upward moves, with the other, wimpier stocks following later.  Presumably, market leaders can also lead the pack downward, though we usually speak of a "leader" with admiration...it's a good thing to own a leader in a positive market.

Finding a "leader" is usually a somewhat mystical process.  It's not horribly difficult to find ways to quantify a leader (just write a program that identifies stocks whose upward moves tends to predict future upward moves in the general market), but the statistics aren't easily available.

Actually, though, we'd guess that stocks that are referred to as "leaders" are simply volatile stocks.  If you have good reason to believe that the market will prosper in the weeks ahead, would you rather own a volatile software stock or a dowdy floor tile manufacturer?  You grab the volatile stocks as quick as you can, knowing that they're likely to prosper above and beyond the general market.

Let's say that you're not particularly sure about the general market, but you do have reason to believe that the group of floor tile manufacturers will be a strong group in the weeks ahead.  What do you do?  You grab the most volatile floor tile company you can find...it should outperform the other manufacturers.

It seems that a fair number of technical guys look for these leaders to make further gains to confirm a bullish view of the market.  It might be more concise to simply say, "the market tends to go up when volatile stocks are the best performing group".  We've made this observation before, though we've yet to quantify it...a future project.  As a starter to this project, we note that on occasions where the most volatile stocks have topped our "10-slice" daily tables in January, the market has gone up 12 out of 13 times in the following session...

Feb 20...the indices showed small losses today, but we stepped away from the "pure" sort of negativity that we saw yesterday.  The best performing groups were stocks of low capitalization, retails, oils, and stocks with a broad number of institutional holders.  Losers included long-term gainers, semiconductors, and volatile stocks in general.

Feb 19...fairly strong bearishness...volatile stocks suffered, non-volatiles held ground.  Fundamentally sound and dividend-paying stocks were relatively strong.  Cheap stocks and yearlong gainers got burned.

The above behavior tips the scales in favor of further negativity.

Feb 18...rather uninspired action, with no groups asserting themselves strongly.  Despite the slightly negative tone in the market today, volatile stocks continued to perform well, including tech and software stocks.  Long term winners AND short term losers outperformed.  Oils and transportation stocks were weak.

Feb 17...a nicely positive day with volatile stocks topping our gainers list and non-volatiles near the top of our losers list...this tends to forecast continued gains in the next trading session.  No particular industries stood out in either category...REIT's were weak, but this would be expected in an environment that favors volatiles.

Feb 14...we've got the results for the first half of February.  Nothing spectacular emerged in terms of the groups we follow.  The period itself was up about 1%, according to a sampling of about 2100 stocks we took.

The best place to be:  retails, especially apparel.  The group was up nearly 4%.  This behavior is quite well in accord with normal February seasonality.  Construction stocks were strong.  Oils outperformed.

On the negative side, volatile stocks were to be avoided, losing more than 2%.  Stocks with large gains on the last day of January were hurt.  Semiconductors were weak, as well as cheap stocks in general.

Feb 13...fairly strong negativity today.  The strongest stocks were the least volatile, while the weakest were the most volatile..."pure" bearishness.  Such behavior raises the probability that Tuesday's session will also be negative.

Fundamentally sound stocks held up well.  Expensive stocks were relatively strong.

On the negative side, cheap stocks and those with poor fundamentals got hurt.

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We've seen some rather silly statistics regarding the probabilities of positive and negative years.  For example, if a calendar year is odd and its January is positive, the market has made a net yearlong gain in every year since 1937, with a 2003 exception.

Presumably, most of these "discoveries" are made by folks who actually believe they've stumbled onto something of importance.  In the spirit of fun, we thought we'd use our software to dig up some of our own "rules".  Just to be clear, we place no little or no faith in the predictive power of these rules.  The main point is to illustrate how a bit of "data snooping" can result in rules that seem important.  All the rules below involve Dow data from 1930 through 2003.  Bear in mind that the Dow has gone up 50 out of 74  (68%) of these years anyway.

• In every year where dividing the year by 8 leaves a remainder of 7, the market has gone up (1999, 1991, 1983, etc).

• In every year where dividing by 9 leaves a remainder of 8, the market has gone up (1997, 1988, 1979, etc).

• In every year where dividing by 3 leaves a remainder of 2 AND dividing by 7 leaves a remainder of 2,3, or 4, the market has gone up (1997, 1991, 1985, 1976, 1970, 1964, 1955, 1949, 1943, 1934)

• Here's a REALLY silly rule:  the Dow has finished up in every year where it finished between 2950 and 7550.

• In 31 of 39 years in which May has been a positive month, the market has gained (this actually beats the esteemed January indicator which has predicted yearlong gains in 30 out of 41 years since 1930).

• 29 of 38 years in which a Democrat has been President were positive years.

• The first two years of a Republican presidency were negative in 9 out of 16 such years.

• If we were to actually give credence to any particular rule, it would be this:  years prior to election years (i.e. dividing the year by 4 leaves a remainder of 3), have gone up 17 out of 19 times.  We won't claim to understand why, but at least there's some potential psychological/political rationale that goes beyond mere numerology.

Feb 12..oil and transportation-related stocks were strong, up around .7% in a negative market.  Other groups that performed relatively well were those with recent losses and high capitalization.

On the losing side, cheap stocks made one of their infrequent visits to this side of the table.  Our historical data shows a tendency for this sort of behavior to repeat on the next trading day.   Stocks of low capitalization lost as well.  Semiconductors were weak.  Stocks with high numbers of institutional holders were weak as well...the third day in a row this indicator has worked its way into our tables.

Feb 11...despite decent gains in the broad market, it was a rather tedious day...separation between the best and worst groups was relatively small.

Large cap stocks performed well.  Volatile stocks in general were weak.  Yesterday's trend toward gains in stocks held by numerous institutions reversed.  Not a single industry group found its way into our tables...the big gains and losses were to be found elsewhere.

Feb 10...interesting, unusual action.  Stocks that are held by large numbers of different institutions fared well, while those held by a relatively small number of institutions were weak.  This "institutional" effect was rather strong.  Stocks of low marketcap or low price also were strong, as well as those with big yearlong or recent losses.  Oils fared well.

We'd be interested in any feedback regarding the above effect.  Note that we also have a statistic that rates companies according to the percent of total stock ownership that is institutional...but this statistic didn't find its way into our tables.  The number of institutions was key today.  It's likely, of course, that this effect somehow relates to tomorrow's Fed announcement, but we're not sure how.

We'd be tempted to say there was some sort of minor "flight to quality" motivation here...but that's somewhat contradicted by today's tendency for stocks with very high or negative p/e's to fare well.

Other losers included stocks with high prices, high capitalization, and large recent gains.

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A humorous article concerning the tribulations of a skeptic at an "astrology and finance" conference:  http://www.theness.com/articles/starsinmyeyes-nejs0204.html .

For a bit more market-related fun, click here.

Feb 9... a bottom-fishing environment...profits were available in stocks with large recent losses, while those with large gains lost.

Oils were strong.

Though neither group stood out, yearlong gainers outperformed the market, while losers underperformed.

Feb 6...most of Wednesday's big losses were reclaimed today (Friday).  In fact, stocks with big Wednesday losses gained around 4% today.  Topping the tables, though, were volatile stocks, with gains as high as 5%.  Yearlong gainers were quite strong, alongside stocks with big recent losses...an interesting combination of long-term momentum and short-term bottom fishing.  Anything tech-related fared well.

On the lagging side, nothing of great significance to report:  non-volatile and expensive stocks were weak.  

Feb 5...stocks with recent losses dominated our top gainers tables today, with gains as high as 1.7%, despite an uninspired market.  

On the negative side, oils, medical equipment makers, and biotech were were weak.  Stocks with big gains over the last 1 or 3 months fared poorly.  Definitely a bottom fishing environment today.

Feb 4...despite the powerful negativity today, expensively priced stocks actually fared as well or better than non-volatile stocks in resisting losses.  Retail stocks held up well.

The losingest groups were topped by volatile stocks, cheap stocks, those with poor fundamentals, semiconductors, and those with large yearlong gains.

Feb 3...on the positive side, nothing of major significance to report.  Retails were relatively strong, as well as stocks with recent volume increases...both to be expected according to the seasonal data.

Our losingest groups exhibited a bit more significance...those with large 3 month losses got burned to the tune of 1.7%...this indicator outdistances the next best indicator of losses by a good bit.  Semiconductors were weak, as well as stocks with big yearlong gains.

Feb 2...The month begins with some unimpressive trading.  Our most significant buy today was dividend-paying stocks, followed by stocks of low volatility in general...both groups up about .6%.  REIT's, banking, and biotech were strong.

On the negative side, volatile stocks, those with big gains over the year, those trading significantly over their prominet resistance levels, Friday's winners, and Thursday's losers took losses.  Semiconductors were weak.

Feb 1 (Sun)...having made some nice gains in January, we're looking forward to February.  But frankly, we're a bit confused as to how to proceed with our January profits.

Regarding seasonal approaches to investing, there are several that could be looked at for gains in February...

1. look at data compounded over the greatest number of years (the most general approach)

2. look at last February's best groups and attempt to emulate them

3. try to find the best match between Jan 2004 and another historical January, then assume that February 2004 will proceed in similar fashion to the February that followed the best January match.

4. buy stocks that fared well in February of last year.

5. assume that this February will fare similarly to other election year Februaries.

To start with, we'll toss the fourth and fifth approaches.  Despite very nice gains last month via the fourth approach, it hasn't worked well on a historical basis in February.  In fact, there's a slight tendency for last February's winners to be this February's losers.  As regards the election-year philosophy, we just don't have any data that leads us to believe that this strategy would be worth pursuing.

The first approach indicates that stocks with strong yearlong and midterm gains should be held.  Late January losers fare well.  Retails do well. Conversely, midterm losers should be avoided.

Looking at the second approach, you'd have to favor non-volatile issues, late January losers, and large caps.  Oils performed well, as well as computer hardware stocks.  Yearlong and midterm losers were to be avoided.

As for the third approach, we like January of 1999 as a match to January 2004.  February of 1999 was an unpleasant month for the general market...losses of better than 6% were seen in the indices.  About the only place you could have walked away with profits was in a couple of retail groups.  Mid term losers (over, say, the last three months) held up well.  Conversely, big mid-term winners got burned...that included computer stocks which had a nice January.

1997 offers a decent match as well.  February of 1997 was also a losing period, though gains were available with the right strategies.  Banking stocks were strong, as well as a number of retail groups.  Stocks with good mid-term and yearlong gains got burned. 

If you're still confused as to which strategy to choose, that's because you should be.  The above strategies conflict with each other in a number of ways.  In search of some additional clarity, we ran our usual compounded tests but took the extra step of ranking the February results in addition to the indicators.  You can see the results here.  Be careful...the results (in red) do not represent percentage gains, but merely the position on a scale from 1 to 50 (the losingest 2% to the winningest 2% of February stocks).  The results emphasize consistency as opposed to one-time large gains.

Our best advice, based on what has been most consistent over the years:  buy stocks with increasing volume toward the end of January or losses at the end of January.  Retails, particularly apparel,  have been consistent, but don't expect spectacular gains.  Avoid volatile stocks and those with yearlong losses.

Pardon my own lack of clear direction.  I suppose that's "unacceptable" in this world of newsletters with "raging buys" and the like.  But if the data is murky, then I'll pass that murkiness on to my subscribers.  Makes sense, no?

Jan 31 (Sat)...we've got our data for the month of January.  Our non-weighted sampling of the market shows an average gain per stock of around 4%...the popular indices show gains closer to 1 or 2%.

Things played out pretty much true to form for the month of January.  Cheap stocks were the best performers with 13% gains, with essentially all the gains occuring in the first two weeks of the month.  Cheap stocks were followed by semiconductors, those with weak fundamentals (as indicated by profit margins and PE ratios), those that fared well last year, and volatile stocks in general.  Biotechs quietly outperformed.

On the negative side, construction stocks were weak, followed by metals and mining.  Stocks that fared well in the closing days of December were weak.

Though not shown in our tables, yearlong losers were relatively weak, while gainers were strong.  This is counter-seasonal behavior, but we're not terribly shocked by it...those who read our commentary know that we're not great fans of the traditional January effect strategy of buying yearlong losers.

The second half of the month, as usual, was murkier than the first, with no astonishing trends emerging.  The average stock lost about .5%.  Going with biotechs would have hauled in gains around 2%, while semiconductors would have burned you to the tune of around 3%.

Jan 30...stocks that finished far from yesterday's highs were up around 3% today, followed by those that simply lost relatively large percentages on Thursday.  The former effect was quite potent in terms of statistical significance. Profits were available via bottom fishing for recent losers, but were also available from stocks trading well over their most prominent resistance levels.

On the losing side, nothing of great significance emerged.  Transportation-related stocks were weak.

The above activity is rather typical for an end-of-month session, in our experience.  We'd expect today's losers to turn around nicely on Feb 2.  We'll see.

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We'll be putting out summaries of the full month of January and the second half of the month in the next day...should be interesting.

Jan 29...despite slight positive bias in the major indices, today's session resembled yesterday's in a number of ways...non-volatile and dividend-paying stocks were strong, volatile issues got burned to the tune of nearly 3%, yearlong and monthlong gainers were hurt, and cheap stocks fared poorly.  Perhaps the market is still trying to digest yesterday's pronouncements from the Fed.

Medical equipment makers were strong, as well as some retail groups.

Off the tables, yearlong losers pretty much paralleled the market.

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As we near the end of the month, it seems that things turned a bit sour on or around Thursday of last week.  It's just guesswork, but in the preceding days, it appeared that money was flowing out of conservative positions into more volatile issues.  For example, we saw positive indices, nice gains in volatile issues, and losses in the non-volatiles on the 16th.  The non-volatiles weren't simply lagging (as they're apt to do)...money was flowing out.

When stodgy investors start getting trigger happy, perhaps it's time to take a second look at the market.  We'll keep our eyes open for similar situations in the future. 

Jan 28...a negative market, driven by the Fed's late-session "can be patient" (with regard to interest rate raises) wording.  The best group of stocks to hold were the least volatile...this group almost managed to keep its head above water despite the stormy atmosphere.  Other groups that fared relatively well were REIT's and stocks with large dividends.

On the negative side, yearlong, quarterly, and monthlong gainers were burnt, as well as stocks trading well above their most prominent resistance levels.  Volatile stocks, of course, were also hurt.

Off the tables, yearlong losers pretty much paralleled the general market.  Cheap stocks actually fared worse than the general market, to the tune of about 2.25% loss.

Normally, this form of bearishness would lead us to predict further bearishness in the next session, but today's results were a bit odd in the sense that the market was clearly news-driven today, so all bets are off as far as we're concerned.

Jan 27...nothing spectacular emerged on this negative trading session.  REIT's resisted losses well, followed by monthlong losers, metals and mining, and non-volatile stocks in general.  On the negative, side, the worst bet was computer hardware stocks and monthlong and yearlong gainers.

Off our tables, yearlong losers performed well relative to the market.

Jan 26...though no particular industry stood out, going with volatile stocks was a profitable strategy today, with gains around 2.5%.  Cheap stocks fared well.  Stocks with recent losses reversed.  Tech stocks and biotechs outperformed the market.

Nothing stands out on the negative side.  Transportation-related stocks were weak.

Off our tables, yearlong gainers were strong, while yearlong losers merely paralleled the market...the traditional version of the "January effect" still shows no signs of a late emergence.

Jan 23...something of a reversal today, with stocks that suffered on Thursday or Monday making a comeback today, and short-term winners suffering.  Cheap stocks fared well, large caps were weak.  Oils and biotech scored, while metals and mining suffered.

Stocks that fared well 252 days ago (1 trading year ago) did well today.  We're rather surprised how often this indicator makes its way into our tables, with last year's one day winners winning and last year's one day losers losing...one would think that the trading behavior on such a distant day would not be relevant.  Most likely, it all relates to earnings reports.

Off our tables, both yearlong losers and winners roughly paralleled the market, with the winners having a slight advantage.

Jan 22...the dominant trend today was toward losses in stocks that have performed nicely over the last month or so.  Accordingly, computer hardware stocks got burned, as well as the volatile stocks group in general.

On the positive side, nothing of great significance emerged.  Utilities performed well.

Off our tables, yearlong losers paralleled the market, while winners underperformed.

Looking at daily tables for January of last year, one sees see-sawing between stocks that have had big losses and stocks that have had big gains.  Our best guess is that this two day trend toward losses in the monthlong gainers group will reverse yet again before the month closes.

Jan 21...Though the broadest market was up, we saw a reversal in the recent trend toward momentum, as opposed to bottom-fishing.  Stocks with strong gains over the last month lost about 2.5% today, while stocks with recent losses gained.

Computer hardware stocks lost better than 3%.  Stocks with yearlong gains got burned, while yearlong losers were strong...the first time this January we've seen this sort of traditional "January effect" behavior.  Some retail groups were strong.

Big question:  What is it that commences an abrupt shift in trading attitude like we saw today?  The shift is rather dramatic, but it would seem that we received little warning.  

Jan 20...despite flatness in the major indices, there were a number of ways to make a pretty penny today.  Our own sampling of 1900 Russell 3000 stocks was up nearly 1%, probably because we don't "weight" stocks by capitalization, and small-caps and cheap stocks fared well today.  

We note that the S&P smallcap 600 (^sml) was actually up better than 1% today, despite flatness in the Nasdaq and Dow.

Going with the most volatile stocks could have gotten you gains exceeding 4% today.  Other strong groups were oils, cheap stocks, and those with good gains over the last month.  Retails suffered, alongside non-volatile stocks in general.  

Though they didn't make our tables, yearlong gainers were quite strong, up around 2%.  Yearlong losers paralleled the market.

Generally speaking, we take this tendency for volatile stocks to prosper and non-volatiles to lag as a sign of continued bullishness.

Jan 16...textbook bullishness...volatile stocks showed gains around 3%, while non-volatile stocks actually showed losses:  it would appear that money is moving out of conservative stocks.  Even stodgy investors want a piece of the recent action.

Telecom related stocks were strong, as well as computer hardware in general.  Momentum strategies, as opposed to bottom-fishing, were featured today.

REIT's were particularly weak.  Oils, metals, and mining also fared poorly.

Not shown in our tables, yearlong losers underperformed (again), while yearlong gainers and cheap stocks walked away with gains nearing 2%. 

Jan 15...the dominant theme today was toward continued losses in oils.  Metals and mining also fared poorly.  On the positive side, tech stocks fared well, with bank stocks just behind.  Retails fared well.

Not shown in our tables, yearlong losers paralleled the market, while winners were a tad stronger than the general market.

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For the first half of January, the general market was up about 4%.

In brief, the best place to invest was in stocks that performed well in January of last year.  You'd have gained up to 15% that way.  The trend was quite significant.  Following that, you could have made gains of better than 10% by buying cheap stocks (no surprise there!), semiconductors (again, no surprise), and stocks with negative profit margins.

On the negative side, the worst place to be was simply non-volatile stocks.  This group actually lost money, reversing December's trend toward outperformance in this group.  Dividend-paying stocks performed poorly.  No particular industry stood out in terms of losing performance.

Outside of what you can see in our tables, yearlong losers only gained about 3%, while yearlong winners were up about 9%.  Obviously, the "traditional" January effect, where yearlong losers are supposed to prosper, has not manifested.  We wouldn't hold out hope that it will, either.  On the other hand, our own version of the January effect, where cheap stocks prosper, emerged in full force!

Stocks with late December losses fared just a tad better than the general market (about 6% gains).

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By the way, your webmaster is putting his money where his mouth is by picking up three cheap stocks at the end of December...kndl, acpw, and oplk.  They're all up about 15% in this 2 week span.  

It's a bit odd that these "cheap stock" strategies haven't gotten much media ink.  In this day and age, bid/ask spreads and commissions are quite minimal regardless of the price of the stock, so all but the tiniest smidgeon of that 15% is profit.  For many a bond holder, that's 2 years of waiting.  There's also the general impression that cheap stocks are, without exception, garbage, so they're better ignored.  So be it.  It's better to stay quiet about some of these trends!

Looking forward with our crystal ball, the rest of the month is murkier than the first half of the month was.  Historically, staying with cheap stocks has proven to be a good strategy, though it's hardly as potent as purchasing them in the first half of the month.

Jan 14...another focusless market...nothing of significance emerged at all in our "top gainers" tables.  On the negative side, oils lost money on a day the general market was up nearly 1%.  Metals and mining stocks were also weak.

Several retail groups were strong.  Cheap stocks fared well.

Yearlong gainers had a slight edge over yearlong losers, though both groups more or less paralleled the market.

Jan 13...a rather focusless market by recent standards.  The strongest trend of the day was toward losses in semiconductors.  Stocks with good recent momentum reversed.  

On the positive side, low cap stocks fared well.  There was a trend toward gains in stocks with low recent volume...make of that what you will.  Stocks with a large number of institutional holders fared well.  None of these positive-side indicators were extraordinarily significant, however.

Both yearlong gainers and losers resisted losses fairly well.

Jan 12...more bullish conditions, with volatile stocks and momentum stocks advancing, and non-volatile stocks actually showing losses today.  Semiconductors were strong.  Cheap stocks fared well, expensive stocks poorly.  Yearlong gainers scored, while losers (not shown in our tables) were relatively weak.

Construction stocks were weak.

Jan 9...a lot of recent trends reversed today.  Momentum plays, which had been a good place to put your money over the last week, got hurt, while stocks that lost big money on Wednesday rebounded.  Oils were particularly strong.

Not shown in our tables, both yearlong gainers and losers performed pretty much in line with the market, with gainers having the edge.  Cheap stocks resisted losses well.  Thus far in the month, the cheap stocks group has been a good place to put your money, in accord with our historical seasonal data.

Jan 8...feels like yesterday all over again...computer hardware stocks were up around 3%, and stocks with negative profit margins fared well.  Stocks with good short term momentum fared well, and those without suffered.  Expensive stocks performed poorly.

Yearlong losers paralleled the market, while winners outperformed.  Oils performed in line with the market.

Jan 7...fundamental data made a rare appearance at the top of our gainers table today, with companies with negative PE ratios and negative profit margins taking the honors.  The tendency for these stocks to fare well was quite significant...we're not sure what to make of it. Cheap stocks also did well.  Volatile stocks continued to perform well, while non-volatiles were weak.  Yesterday's winners continued to prosper.

Computer hardware stocks were strong, while metals and mining was weak.

Though not in our tables, yearlong losers were weak, and winnners were relatively strong.  Oils were quite weak.

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I've been reading up on a number of academic studies regarding momentum investing.  The general consensus seems to be that contrary investing (buying losers) works better on a short time scale (up to a month), while momentum strategies work well at more mid-term time scales.  Of course, there are a lot of definitions of "momentum", and each of these researchers must define one for their studies.  In my experience,  the street version of "momentum" generally refers to short-term strategies as opposed to mid-term strategies (e.g. if the stock has gone up for 12 months, buy it and hold it for another 6 months).  In that sense, these academics are somewhat out of touch with the ordinary investor.

For every academic investment thesis out there, you'll find someone who has attempted to disprove the thesis.  There are even those who question the January effect.  It's interesting to note, however, that in the momentum studies mentioned above, a common practice is to disregard January data since the presence of January data mars an otherwise significant tendency for mid-term winners to continue to win over the next few months.  Other researchers will create two tables to display their data...one that includes January results, another without. 

You won't find a lot of these sorts of mid-term momentum strategies in our monthly or quarterly tables (e.g. for a good first quarter gain, buy stocks that have prospered over the last 3 months...a hypothetical example).  That's not to say these strategies don't work.  Rather, we've identified numerous better strategies that knock most of the mid-term momentum strategies off the tables.

Other momentum studies focus on "industry momentum"...buy stocks in a winning industry group.  On a mid-term basis, this has been shown to be a particularly strong momentum strategy.

Jan 6...though the indices finished flat, the most volatile stocks finished about 2% higher.  Yearlong gainers were strong.

Oils were weak.  They've been strong for over a month, so a number of analysts finally decide now is the time to start touting the group.  Now, of course, they're not showing much life...

Though not shown in our tables, yearlong losers were weak.  Cheap stocks, our favorite January group, outperformed the market.

Jan 5...a very positive market.  Volatile stocks moved upwards, non-volatiles were weak.  Biotechs and medical stocks were weak, however, masking even greater gains in the volatile stocks group (sans biotechs).  Insurance stocks and a number of retail groups (despite K-Mart's 25% gain for the day) were also weak.

Momentum prevailed...stocks trading well above their 20 day moving averages and yearlong gainers continued upwards.

Though they didn't make our tables, cheap stocks performed well.  Yearlong losers were relatively weak.

Jan 4...still more on stock pricing...yesterday we asked which industry groups are currently the cheapest (on a simple stock price basis).  One might wonder which groups are the cheapest after risk-adjustment.  In that case, REIT's are the cheapest group, followed by utilities, communication services, oils, and apparel.  Software stocks are found further down the list.

By far the most expensive group is construction stocks.  They're followed by metals and mining, and a host of different high-tech groups.

Of course, all this harping on the subject of cheapness is for naught if 2003's pattern of gains in this group should reverse.  But 2003 wasn't the first year in which cheapness was a strong predictor of gains.  Take a look at our historical data.

Jan 3...more on the subject of stock pricing...

Below is a table of industry groupings ranked according to percentage gains in 2003.   The industries were divvied up into 50 groups.  Inside the parentheses, we've listed the ranking of the industry in question according to price (the industry with the cheapest average price receives a "1", the most expensive a "50"). 

Amazingly (we think), none of the top-performing industries ventured into "expensive" territory (a price rating greater than 25), AND none of the bottom-performing industries could be accorded a "cheap" designation.  

The most "out of sync" industry would appear to be REIT's, which were our 8th worst industry despite being only the 22nd most expensive group (or 28th cheapest, as the table shows).  Utilities and some retail groups were also somewhat "out of sync" with what you'd expect given their prices.

Again, you can see our 2003 year-end result tables here.  One final experiment, the results of which aren't shown here, was to divide all our indicators into 50 groups (as opposed to our usual 10 or 25).  Of the top 25 predictors of 2003 gains, NONE involved industry groups!  The best predictor, of course, was the top 2% cheapest stocks in our database, averaging a 230% gain for the year.

Now, what are currently the cheapest industries when we divide industries into 50 groups?  The cheapest are software stocks, followed by computer hardware, semiconductors, scientific equipment, and business services. If you're looking for cheap stocks that aren't particularly high-tech, try oils.  Retail in general and REIT's are also somewhat cheap.  On the expensive side, the list is topped by computer service stocks, construction services, investment and consumer services, insurance, banks, aviation, and food processing.

Jan 2...we began the new year in rather predictable fashion.  Stocks that lost on the last trading day of 2003 or had poor showings in the closing days of December were the strongest stocks today in a very significant way.  Cheap stocks did well.

Expensive stocks lost money.  Retails and banks were weak.

Not shown in our tables, yearlong losers and yearlong winners slightly outperformed the general market.  Oils lagged a tad, while semiconductors were a bit stronger than the market as a whole.

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Below (Jan 1), we discussed cheapness as an indicator of future gains.

On one hand, a stock's price doesn't seem like a particularly logical predictor of future gains.  At a company's IPO, there isn't any particular rule for setting the price of a stock.  What's more, stocks split all the time, so price has little to do with the past success of a company.  In itself, the price doesn't tell you much about the company.

On the other hand, price is certainly the most basic criterion in stock selection.  There's a very different "feel" to a $130 stock than a $3 stock.  Regardless of fundamentals, the former stock doesn't feel like a bargain, while the latter does.  You might look at the $130 stock and think, "hell, is there any way it could double at that price?".  You might look at the $3 stock and think "great deal".  Then again, you might think "junk".  Price is a potent psychological criteria in stock selection.

Of course, there are some practical considerations related to pricing.  Small guys can't or don't buy round lots of expensive stocks, though one would presume these guys don't have much influence in the market.  Bid/ask spreads are often larger for cheap stocks.  Stocks under $5 are more difficult to short and are less likely to have options trading under them...cheap stocks are less likely to be used as hedging instruments.  Particularly cheap stocks are in danger of being delisted.

Jan 1...we've posted results for the year.

As has so often been the case, cheap stocks dominated the list of top gaining stocks.  It's not so much "market-capitalization", all you gurus out there.  It's CHEAPNESS!  

While virtually every major market service's year-end "wrap up" focuses almost entirely on industries and possibly small caps vs large caps, these groupings aren't heavily represented in our data tables for the year.  The real gains are found in cheap stocks, volatile stocks, and stocks with heavy losses in 2002.

Below, we show the results of an experiment where (read carefully) we used volatility, marketcap, and industry data to predict stock price (just the price of the stocks, not the % gains over a future period). You can see that the 4% of stocks with the highest capitalization were the most expensive, averaging $39.48 at the end of 2002.  The 4% most volatile were the cheapest, averaging a mere $3.83.  Only at the bottom of the lists do you find any industry representation. 

The case we're hinting at here is volatility and capitalization is primary to industry groupings in correlating with a stock's price.  Further, in 2003 at least, cheapness was by far the most significant predictor of future gains, not any particular industry grouping.

Now, assuming that cheapness will again be a predictor of gains in 2004, what groupings are currently the cheapest and most expensive?  

You can see that semiconductors are found in the cheapest industry grouping we have, averaging $17.27 per share.  Still, they're a good deal more expensive than last year ($10.34).  Note also that the most volatile stocks increased in price from less than $4 to nearly $10.  Finally, it's interesting to see that the basic arrangement of the tables from 2002 and 2003 are quite similar.

Of course, the absolute cheapest group of stocks is...the cheapest group of stocks.  What we're doing here is looking at "secondary" predictors of cheapness.

So, if you want to make a 2004 prediction, you might venture a guess that semiconductors will prosper.  If you turn out to be right, you'll win special kudos for picking this group at this time, since a number of prominent gurus have been predicting a lousy 2004 for the group.  Be sure to make the prediction with a good deal of aplomb (try "Contrarian Pick of the Decade" or "Why the Experts are Wrong...Semiconductors will Sparkle in 2004") and don't mention that you're simply picking the cheapest industry...better to dazzle with your knowledge of book-to-bill ratios.

If you turn out to be right, you can bang investors over the head with this prediction for at least the next ten years (hey, some pundits are still bragging that they predicted crashes in the 1980's).  If you turn out to be wrong, don't worry about it, since nobody is likely to remember your prediction anyway.

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Worried that somehow our analysis program has some sort of bug that overemphasizes gains in cheap stocks, we went back to a list of stocks we created in January of last year (2003).  We sorted the stocks by price, and looked at the individual performance of the cheapest stocks, in order...oplk, tmr, cpst, scon, hand, dgit, mrvc, ocpi, stor, tmta, dyn, wstl, sww, vign, epic, lu, vlnc, sfe, onnn, mslv, egov, imny.  Check out the gains for yourself...they're phenomenal!

Note that the above list actually contains some fairly large-cap stocks (e.g. Lucent, Dynegy).

We stop our list at imny for a reason...it's the first stock (#22) on our list that actually showed a loss for the year (-35%)!  Two of the stocks ceased trading during the year (hand and stor).  But both of these stocks ceased trading at prices above their January prices (each with gains around 50% before they went off the radar screen).

It should be noted that these stocks were the cheapest stocks in the Russell 3000, not the cheapest stocks in the American market.  The fact that these stocks were actually strong enough to be listed in this index, which won't accept micro-cap stocks, might mean that the larger body of cheap stocks didn't/wouldn't fare as well...one should not draw the lesson that buying the absolute cheapest stocks in the entire American market will produce the most phenomenal gains.  It's safer to choose your cheap stocks from an established index like the Russell 3000.

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