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Biotech / Medical : Biotech Valuation -- Ignore unavailable to you. Want to Upgrade?

To: Biomaven who wrote (4043)	6/7/2001 3:32:41 AM
From: Doc Bones	Read Replies (1) \| Respond to of 52153

Peter, Thats great! I had toyed with "reproducing your results," fiddling clumsily with various charts without much success. It's now clear that the fault did not lie in the data. The correlation is remarkable. I think it's quite possible that some kind of computer-driven trading is involved, as you have speculated. One of the finding of the quants is that there is auto-correlation in indexes, even though there is not much in the stocks that make them up: that is, momentum exists for indexes, an index that was up last week is more likely to be up this week, even though the stocks in it do not show much momentum. The reason is that there is cross-correlation between different stocks in the indexes. An example they've used is that if Microsoft is up this week, Dell may be (slightly) more likely to be up next week. This is discussed in an interesting interview in 'Derivatives Strategy' with Andrew Lo, finance professor at MIT, and author of A Non-Random Walk Down Wall Street with A. Craig MacKinlay (Princeton University Press, 1999), which examines some of the major market anomalies of the last three decades. derivativesstrategy.com While he only mentions cross-week correlations, a quant credo is that markets are fractal, and so self-similar at all (time) scales. (Lots of nature is fractal, e.g., the branching of the lungs, which are self-similar at all levels of branching.) I'm sure there are numerous "plays" available involving indexes, just don't know what they are. Lo says that people have been exploiting the cross-week cross-correlation of stocks with "pairs trading," and that quant superstar company D.E. Shaw had become particularly adept at finding the best correlated pairs by computer, to the point where much of it had been arbitraged out of the market. I expect that if people were pair trading lots of related stocks (e.g. buying Dell because Microsoft had a big gain) this could make different indexes, say DRG & BTK, move in tandem, even if no one were trading the indexes themselves (thru futures, options, etc.). Anyway, all this is quite speculative, but there's something there, and computers are increasingly controlling trading. An ironic note from the Lo interview, a caution for those with the hubris to challenge the trading gods with mathematics, regarding the fate of what became "Short Term Capital Management": For example, the reason that LTCM increased the risk of its portfolio after returning money to investors was because it was actually bearing much less risk than it wanted. People there show an extremely compelling series of statistics in which the portfolio's standard deviation was quite a bit lower than that of the S&P500, which is about what it wanted the standard deviation to be. (LTCM used pairs trading, among other things.) Thanks, Peter, for your work on this, and sharing your discovery with us. This correlation shall henceforth be known as: THE PETER PRINCIPLE (Wait - let me work on that some more.) ;-) Doc

To: Biomaven who wrote (4043)	6/7/2001 11:04:36 AM
From: Mark Bong	Read Replies (1) \| Respond to of 52153

Peter, for the short term, it appears that sector money flow is more important to individual stock fundamentals. Perhaps this helps to explain why on some good news days that biotech stocks do not react positively while on other days a little good news has a major reaction on price (usually when biotech is having a good sector day). Your chart confirms a lot of anecdotal and empirical observations that I have made over many years. I also read John Murphy’s book titled “Intermarket Technical Analysis” where he demonstrates many of the same principals but on a broader scale. It was an interesting read. Your son did terrific work. Thanks Mark