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.