Four Sigma Picks Valeant Pharmaceuticals International

Our stock picking systems have started picking up steam and today picked Valeant Pharmaceuticals.  It will put the stock into the portfolio if it trades above today's closing price anytime over the next 5 days.

Earlier this week, the system picked Cantel Medical Corp which has held on to a solid gain this week of almost 14% so far.

The Sigma value of the VIX has been steadily falling indicating some of the fear is leaving the market.  The overall market Sigma is still below 1, but it has been increasing little by little which is a very good sign.  There have been several industries that have broken into positive Sigma territory as a whole indicating strength.  These are industries you would expect to do well, but there are some surprises.  

Industries that have been rising are travel and leisure, education services, fertilizer chemicals, steel producers, heavy construction, and discount retailers.  In this economy and with the current Barack Obama plan for infrastructure investment, it's no wonder these stocks are doing well.

Keep watching for more stock picks.  I have a feeling 2009 may be a very good year for our stock picking system.  Watch it at www.foursigmatrading.com.

Positive Territory; Education Stocks Pass A Milestone Today

Since this economic turmoil in the market began a few months ago, every sector has been in negative sigma territory.  Today, for the first time in more than two months, one sector crossed above zero; education stocks.  These are the stocks that have been leading the way for the past month as jobless rates increase and people are looking to sharpen the saw in the classroom.

Apollo Group is leading the sector and has been on a relative tear approaching a new 52 week high.  Capella is up more than 50% from its lows in October.  Universal Technical Institute is a close third in its sigma performance teaching automotive, diesel, collision repair, motorcycle and marine technicians.  It's no doubt these skills will be great to have as people are putting off the purchase of new vehicles and maintaining their old ones.

It's exciting to see the sector turn into positive territory although the market in general is still seeing a sigma value below 2.5.  Another bright sign is the sigma value of the VIX has been dropping and is now at -1.23.  This is an indicator that the volatility is calming down and getting back to normal.

Find all of the sector sigmas at http://foursigmatrading.com/industrygroups.php.  

Oil and Gas Stocks Continue to Get Drilled

Nov 20, 2008 – Jupiter, FL – Oil and Gas stocks are continuing to lead the market lower with the worst performance as a group according to a new trading indicator, Sigma, developed by Four Sigma Trading.  Carving the deepest lows is Nabors Industries, Ltd., a land drilling contractor from Hamilton, Bermuda sporting the lowest sigma value in the stock market.  Sigma shows how normal the current stock price is by measuring the standard deviation of the recent stock price movements. 

“Sigma is an oscillator that normally falls between -2 and 2 for a typical stock with the majority of the market hovering around an expected -1 to 1 “normal” level.  When things start going too far negative or positive, we know something abnormal is happening with the stock and it’s time to take notice” said Jim Snyder of Four Sigma Trading, “Nabors is currently the stock with the lowest sigma value at -9.31.” 

In this economy and the way oil prices are headed, it’s no wonder why these stocks are going lower.  The energy industry has the lowest sigma value as a whole at -3.46. 

“If you average all of the sigmas in the market right now, you get an average of -2.70 which is incredibly low,” says Jim Snyder.  “Looking at individual industry groups, those in discount retailing and some banking sectors are beginning to recover.” 

Watching the sigma values may give good ideas for stock picks.  Stocks making high Sigmas could be takeover targets, launching new products, or gaining attention from some larger players in the market.  The highest and lowest sigmas are flagged by Four Sigma Trading for further investigation on their website at FourSigmaTrading.com.  Find out more at FourSigmaTrading.com or read the Four Sigma Trading blog at foursigma.blogspot.com.

Education Stocks Lead in Performance According to Four Sigma Trading

Jupiter, FL – A new trading indicator, Sigma, developed by Four Sigma Trading shows companies in education services were outperforming all other groups recently.  Sigma shows how normal the current stock price is by measuring the standard deviation of the recent stock price movements. The sigma indicator, developed by Jim Snyder at Four Sigma Trading shows.

“Sigma is an oscillator that normally runs between -2 and 2 for a typical stock with the majority of the market hovering around an expected -1 to 1 “normal” level.  When things start going too far negative or positive, we know something abnormal is happening with the stock and it’s time to take notice.” said Jim Snyder.

In this dark and gloomy time in the market, every industry currently has a negative sigma on average although there are still some bright spots that are worth looking into.  Education services contains companies like Capella Education Company, Apollo Group, and DeVry, Inc., which have all jumped to positive territory as of late.

Why are these stocks performing well?  It seems the education market might be counter-cyclical to unemployment rates as more adults may be enhancing their skills in a weak job market.

“If you average all of the sigmas in the market right now, you get an average of -2.55 which is incredibly low,” says Jim Snyder.  “Looking at individual industry groups, those in discount retailing and some banking sectors are beginning to recover.”

Stocks making high Sigmas could be takeover targets, launching new products, or gaining attention from some larger players in the market.  Either way, high Sigmas are flagged by Four Sigma Trading for further investigation.  Find out more at FourSigmaTrading.com or read the Four Sigma Trading blog at foursigma.blogspot.com.

Four Sigma and Three Sigma Picks NL Industries

Finally! The Three and Four Sigma Systems both picked the same stock for trading yesterday. The stock didn't rise above the close on Thursday, so it didn't actually put the stock in the portfolio. We give the stock five trading days to trade above the signal day's close to generate the trigger to buy.

Quick side note on how the system works: the trading systems "signal" a stock and then wait for a "trigger" to purchase the stock. In our case, the "trigger" happens the day after the signal day if the stock trades over the signal day's closing price. So, the signal happens the first day and then triggers a buy the next day if it goes up. The system holds the stock for 50 days and then sells it.

Either way, we were all happy to see the system finally begin to signal stocks again as the market appears to have stabilized at least for now. The sigma value of the VIX is dropping which is good news and the sigma value of the market is increasing (from a very negative value) which is good news too. Stay tuned for more signals from the system and, hopefully, triggering some buys.

New Feature on the Four Sigma Trading Website

Today, I added a couple of cool features to the Four Sigma Trading website.  On my "philosophy" page you will see a yellow box on the right side of the screen.  At the top, there are the results of the systems that are currently running.  Under that, there is something called "Current Market Sigma" and "Current VIX Sigma".

The Current Market Sigma shows the average of the sigma value for roughly all of the stocks in the market (I omit very small stocks with small trading volume).  The more negative the number, the worse the market has traded over the past few weeks, and the higher the number, the better the market is doing as a whole.  We should expect the number do be between 1 and -1 in a normal market.  As of this writing, the market average is at -2.60 which reflects how bad the market has been doing over the past few weeks.

The Current VIX Sigma shows where the volatility index is relative to its normal range.  This too should probably be in the range of 1 to -1 in a normal market.  However, as the VIX's sigma becomes more positive, this is a sign the market is trading at a more abnormally high level.  The more negative the VIX's sigma, then that shows the market is much more calm.

How can you use these numbers?  Well, if you have a high market sigma and a high VIX sigma, then there may be a top forming in the market.  If you have a very low market sigma and a high VIX, then the bottom may be forming.  We like to see the vix sigma hovering around its normal range with a positive market sigma.  So, watch the VIX sigma and the Market sigma together to get a feel for the current market situation.

Then you will see a two lists; one is the Top Ten Sigmas and the Bottom Ten Sigmas.  These lists show you the stocks that are trading at higher levels than normal (and are probably good breakouts) and those that are trading much lower than normal and may be breakdown plays or may be ripe for value investing.

Stay tuned as we keep finding more ways to use sigma.

Four Sigma Trading Is Still Quiet

This market is sinking lower than John McCain's Campaign numbers!  The only things really rising are unemployment and bank failures.  The Four Sigma Systems are probably going to stay quiet since just about every stock in the market is in deep "negative sigma" right now.  The systems pick stocks that are hitting higher sigmas which actually requires stocks to rise.  It will probably take a few more weeks to get some stocks to come out of the slump.  I'll be working on some interesting sector sigmas to let you know what the strongest sectors are.  These may be the ones that will start their own bull market.  Stay tuned for more...

Cascading Crash

They are calling this a "cascading crash".  We're all doomed!  Ok, just kidding, we all know how these things play out.

This crash was artificially strung out from the government bailouts.  It had to happen sooner or later anyway, so perhaps the government should have just stayed on the sidelines and let the markets work everything out.  Who knows if we would be worse off, but based on what the market is saying, it doesn't matter.

Both the Three and Four Sigma Systems, as you might expect, are in the negative at the moment as their picks are deep in the red.  As I stated in the earlier blog post, a prudent person may not be trading at this point with the market the way it is, but we let the system buy and hold its picks.  This is a toxic environment for any long trading system with the VIX trading at over 3 standard deviations above the mean, and the Dow trading at 5 standard deviations below the mean; OUCH!

The VIX is the highest it has been since 1987 which is indicative of a "crash".  Although we did not see this crash happen all in one day, it has been happening over the process of a week.  Overall, this is going to be very good for the market to sweep out the very weak stocks and the weak players in the market.  Over the next three to five years, we are going to be in for an interesting, and I think rising, market.  Typically after a severe crash like we've had, the market slowly rebounds and the bears go away for a while.

The Four Sigma Systems perform extremely well after a bear market, sometimes seeing average gains over 100%.  This is because it trades the stronger stocks that are gaining momentum and getting a lot of attention.  I'm looking forward to seeing how this plays out and I'm looking forward to some very nice profits over the next few years.

Once we do reach a bottom and the market becomes sane again, the system will probably end up picking a lot of stocks over a short period of time.  A majority of these stocks will be winners, but we still want to concentrate on the stocks with good fundamentals.

It should be interesting to see what happens next week.  If history is any indication of the future (which, of course, is never guaranteed), then we will see a small rally, then retest the bottom before a prolonged bull run.  Only time will tell.  In the meantime, get your fedora and I'll see you in the bread lines.

Getting Caught In Volatility

The events over the past week have created significant spikes and volatility in the market.  The VIX (the measure of volatility in the stock market) on September 17, 2008 measured just over 36 which was the highest since late 2002.  An automated trading system like Four Sigma can get caught in the volatility and certainly did this time with a large number of picks the day the market rallied after two days of giant losses.

A prudent person would most likely not make the trades in the financial sector that the system ended up making, especially in the insurance sector.  There were several companies that rose with the prospect of taking some of the business from AIG as it was going down.

Although we would have liked to sit on the sidelines during this turbulent time, we'll let the system plow on and make the trades.

The New Three Sigma Long and Short Systems

The sigma indicator I developed that measures the standard deviation of the change of a stock over a certain period of time is showing a great deal of promise when used not just on its own as an oscillator, but when used as it is rising or falling over different time horizons.

For instance, the three sigma long system works when the sigma over progressively longer time horizons is rising showing that a stock's move is becoming more and more abnormal, yet rising.  When this happens, stocks tend to continue their rise.  I also studied the opposite as a sigma starts out high and then begins to show weakness over progressively longer time horizons.

The Three Sigma Long System is posted at www.foursigmatrading.com and I expect to have the short system up and running shortly.

Four Sigma Enters Lakes Entertainment

Lakes Entertainment crossed over the signal price of $8, so the system purchased the stock at $8.08.  Looking closely at this chart, is it in a beautiful uptrend right now.  I'm a little worried since the company does have negative earnings, but even in the latest financial turmoil, the stock is holding up very strongly.

Four Sigma Picks Lakes Entertainment, Inc.

The Four Sigma System picked Lakes Entertainment today at $8. The rise in the stock could have been sparked by the fact that the CEO just purchased 1 million shares through an option grant at a strike price of half of today's close, but isn't that really a no-brainer? The system performs well when the stock is less than $20, and has positive earnings. Unfortunately, Lakes Entertainment does not have positive earnings, so that makes this stock pretty risky according to the system. So far, there have been two stocks picked this year with these characteristics, and they have not fared well. I do like this business, however, especially with its large stake in the WPT. What is going to drive positive earnings? It looks like the next two quarters are expecting larger losses. We'll definately keep an eye on this one.

Creating A New Trading Indicator - Sigma

It was the steamed glass shower door that was an ideal canvas for drawing up trading ideas.  I began looking at stock market data when I was working on my MBA at the University of Michigan and trying to make the connection between company financials and its stock performance.  My Aerospace Engineering degree from the University of Florida that gave me the wide range of analytical skills I needed to pick apart the stock market.  Give a Rocket Scientist an MBA and this is what you get.

I was on the hunt for a way to predict stock price movements.  Everyone was giving out stock tips in the late '90's and there had to be a way to quantifiably figure out the stock market.  I've purchased many stock systems, both long and short-term. I never really found anything that could work while still allowing me to work on a "day job" (I worked a Ford Motor Company at the time) or have a life.  It did seem like you could pick up just about any "tech" stock at the time and it would just continue to rise.  This was back before E-Trade was a web-service and we had to trade stocks through America Online using keyword "etrade".  Fun times!

I began a quest to figure out some type of a stock trading system that could generate a consistent positive return over a relatively short term, but not be a day-trading system.  This became a passion of mine and I toiled away to develop a system that would work in a bull, bear, or flat market.  I surfed the internet and downloaded stock market history at 56k to find my answers with my Intel 486 Laptop and Windows 95.

More than a decade later, after reviewing many systems, reading countless books and actively trading both with real money and on paper, I have finally have a system that works! I had to invent a new indicator to do it, but it has shown a pretty consistent return.

Here's where the shower door came in.

In the late '90's, I watched countless stocks rise very quickly and get to a point where they were unable to hold the momentum and then quickly turn around and fall as fast as housing prices in South Florida; usually after a big story on CNBC.  I wanted to find a way to short a stock at the peak of the movement and then ride it down.  I was drawing the stock movements on the shower door when I pieced together the idea for calculating how normal or abnormal the stock move was.  What if you could calculate the standard deviation of the move of the stock and when it gets to a certain point, short it and watch it fall.

It was about this same time that I learned the trick of a signal and a trigger.  Many stock systems were looking for a pattern in the stock which would be a signal, and then looked for a further confirmation in a specific price move that would trigger the purchase or short sale of a stock.

So I calculated the standard deviation of the change in the stock's price over a certain period of time and found the value or the "sigma" when the peaks occurred.  Theoretically, these peaks shouldn't happen very often.  Stocks that showed a three, four, or five sigma move should be an abnormality, like twenty-somethings convincing seasond VC's that you can monetize a website with eyeballs.  When these moves occurred, I had the system issue a signal to watch for weakness in the stock price.  When the weakness in price occurred, then the system would short the stock or buy a put option.  For high-priced stocks with high volume, this system worked beautifully.  What was interesting about this was that lower priced stocks had the tendency to continue their abnormal rise after it reached the three or four sigma gain.

These two systems were launched in the form of StockMachines.com in 1999.  StockMachines ran the system for a few years and eventually morphed into FourSigmaTrading.

FourSigmaTrading now searches every stock in the market for specific trading patterns involving its sigma and issues signals when it finds them.  If the stocks it signals continue their meteoric rise the next day, then issues a buy signal.  The system holds the stocks for a certain period of time and then sells it.

We're going to continue to talk about "sigma" here as well as the trading systems derived from it and the stocks it picks.  We're going to win some, but we're also going to lose some.  We hope the winners will outpace the losers when it's all said and done.  The system currently runs at a little over a 60% win rate with the winners making about twice as much as the losers.  Let's see if it holds true in the future.