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Strategies & Market Trends : Trading the SPOOs with Patrick Slevin!
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To: Patrick Slevin who wrote (4410)4/13/2000 8:01:00 PM
From: fut_trade  Read Replies (1) of 7434
 
My thought at this point is that restricting the pool of stocks to the OEX is a limitation because the OEX contains quite a few low-market-cap stocks. The largest, most volatile stocks of the SPX are needed in the pool.

Then I was thinking of making two groups (as you suggest) of the 12 highest and lowest beta stocks. A market-direction indicator could then be defined as the sum of the market caps of the high beta stocks minus the sum of the market caps of the low beta stocks. Perhaps it could be normalized by the sum of the market caps of all the stocks in the pool - this would limit the indicator to values ranging from -1 to 1.

...Intermediate-term Trend Indicator

Given the wild swings of the market from week to week, I'm thinking that it would be nice to have a general idea where the market is going several days ahead. I guess one way to test the indicator is to make a plot of the indicator (x-axis) calculated for a given day and the percentage change of the SPX (y-axis) three days later (duration of the intermediate trend?). Maybe the 10-day MA of beta will need to be adjusted.

I don't have a lot of confidence in derived indicators, but I think it's worth a try. If the plot doesn't show any correlation, then we trash the idea.

My second thought is that this approach is more likely to be useful in stock trading, going long the high-beta stocks or short the low-beta stocks depending on the value of the market-direction indicator.
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