Technical Analysis of STOCKS & COMMODITIES
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Article Archive For Clifford J. Sherry, Ph.D.
DownloadSquashing Functions by Clifford J. Sherry, Ph.D.
ARTICLE SYNOPSIS ...Squashing Functions by Clifford J. Sherry, Ph.D. Here's one way to mathematically transform data from one scale to another while maintaining the information content. Those who use neural nets to model equity markets to develop a trading strategy probably use a squashing function on the individual inputs to your net. A squashing function preprocesses the data. Typical data, such as stock prices, begin with a positive number and have no upside limit. But neural networks work best with numbers that have a range. Often, one of two sigmoidal functions are used to change data from having an unlimi...
Are Your Inputs Correlated? by Clifford J. Sherry, Ph.D.
ARTICLE SYNOPSIS ...Are Your Inputs Correlated? by Clifford J. Sherry, Ph.D. If you use neural nets to model the behavior of equity markets in an effort to develop a trading strategy, it's likely that your model has multiple inputs. You may very well find that two or more of your inputs are cross-correlated. Basic modeling theory suggests that you should avoid inputs that contain significant cross-correlations. If two of the inputs to your model were perfectly correlated, then removing one of them should have no impact on your model's efficiency. On the other hand, if the correlation is not perfect and removing...
What is the Impact of the S&P 500? by Clifford J. Sherry, Ph.D.
ARTICLE SYNOPSIS ...What is the Impact of the S&P 500? by Clifford J. Sherry, Ph.D. What impact does the variability of the market have on the price behavior of an individual stock? Technicians often use the Standard & Poor's 500 stock index as a model for the market when calculating beta and alpha. We can use the S&P 500 as a model for the market and attempt to factor out its effect on a stock with a high book-to-price ratio (Ahmanson, or AHM) and a stock with a low book-to-price ratio (Coca-Cola, or KO). They would be considered examples of a value stock and a growth stock, respectively....
Money Supply And The Leading Economic Indicators by Clifford J. Sherry, Ph.D.
ARTICLE SYNOPSIS ...Money Supply And The Leading Economic Indicators by Clifford J. Sherry, Ph.D. This longtime Stocks & Commodities contributor and author discusses the relationship between the money supply and the composite index of leading economic indicators. The National Bureau of Economic Research developed a system of leading, coincident and lagging indicators covering a wide variety of economic processes in the 1930s. The monthly figures for these indicators and their components, as well as a variety of other economically important time series, are published by the US Department of Commerce in Business ...
How Random Is Random? by Clifford J. Sherry, Ph.D.
ARTICLE SYNOPSIS ...How Random Is Random? by Clifford J. Sherry, Ph.D. Some fundamentalists and most technicians would probably agree that tick-to-tick or maybe even day-to-day price changes aren't completely random. Most fundamentalists would argue that price changes over longer time periods are affected by different factors, the impact of which makes price changes random. Technicians, on the other hand, argue that past prices affect current prices. It's difficult for them to believe price changes are completely random. I originally proposed a test for divergence from randomness about seven years ago, which was...
A more conservative estimate of risk by Clifford J. Sherry, Ph.D.
ARTICLE SYNOPSIS ...A more conservative estimate of risk by Clifford J. Sherry, Ph.D. Risk is, or at least should be, of interest to all investors. One of the traditional measures of risk is the standard deviation of expected returns (that is, the spread of the expected return around the mean or average expected return). I think that there may be a better, more accurate, measure of risk, assuming that we want to define risk in terms of dispersion First, we need to agree on a few definitions. The first is deviation: ......
Behavior of the Standard & Poor's 500 Stock Index by Cliff Sherry, Ph.D.
ARTICLE SYNOPSIS ...Behavior of the Standard & Poor's 500 Stock Index by Cliff Sherry, Ph.D. Is it stationary, random or independent? Editor's note: In preparing for magazine publication, this article has been heavily condensed. Some insights that were peripheral to the S&P's characteristics were deleted as were most comments on statistical technique. Readers can find many technical details in previous S&C articles by Dr. Sherry. Details of Dr. Sherry's calculations are available from him at (409) 823-0618 Standard & Poor's 500 Stock Index is important for a number of reasons. First it is used as a gauge of ge...
Correlations: serial and auto by Clifford J. Sherry, Ph.D.
ARTICLE SYNOPSIS ...Correlations: serial and auto by Clifford J. Sherry, Ph.D. Suppose you are testing a pricing pattern to see what relationship it has to future price movement. Or, you are testing an indicator's correlations with price movement. In each case, you need a definitive test to tell you if there exists a statistically significant relationship. Again, much of the early work testing the various forms of the efficient market hypothesis utilized either serial or auto correlation techniques. (See for example, P. Cottner's Random Character of Stock Market Prices, M.I.T. Press, Cambridge, 1964). Unfortuna...
Money supply (M2): A leading economic indicator by Clifford J. Sherry, Ph.D.
ARTICLE SYNOPSIS ...Money supply (M2): A leading economic indicator by Clifford J. Sherry, Ph.D. I want to show you an analytical technique that you can use to estimate the probability of future price increases or decreases. I'll use the money supply figures (M2) from 1948-1978 as an example, but you can apply this to any consistent, continuous series of prices. Along the way, we'll learn some interesting things about the behavior of the money supply. Fundamentalists (and possibly some technical analysts) seem to believe that economic indicators which provide an indirect measure of aggregate supply and demand m...
Understanding Randomness Exercises For Statisticians by Clifford J. Sherry, Ph.D.
ARTICLE SYNOPSIS ...Understanding Randomness Exercises For Statisticians by Clifford J. Sherry, Ph.D. Author: David Salsburg Publisher: Marcel Dekker, NY, 1983 If you are an investor, whether you believe in the efficient market hypothesis or not, it important for you to understand how a random process works. This book consists of a series of exercises that are designed to help the reader distinguish between patterns that occur in a series of numbers (stock prices, etc.) as a result of random noise and those that occur because of some underlying structure. Some understanding of elementary statistics (chi-squar...
Are there patterns in financial ratios? by Clifford J. Sherry, Ph.D.
ARTICLE SYNOPSIS ...Are there patterns in financial ratios? by Clifford J. Sherry, Ph.D. Technical analysts strive to find patterns in the past history of the prices of stocks and commodities (using charts, moving averages, etc.) that will allow them to predict future prices or price movements. The major argument against this idea is the assumption that prices are determined by a random and independent process. I have developed a number of statistical techniques that will allow you to determine if the process you are interested in is random (Stocks & Commodities, March 1986) and/or independent (October 1985, Apr...
Runs: A method for detecting 'rhythms' in prices by Clifford J. Sherry, Ph.D.
ARTICLE SYNOPSIS ...Runs: A method for detecting 'rhythms' in prices by Clifford J. Sherry, Ph.D. Do runs or clusterings of like observations, such as 'rhythms' of price increases or decreases, occur by chance alone or is there some deterministic process at work? Statisticians have provided us with several simple methods for determining if the number of runs (clusterings) in a set of data (like the prices of stocks or commodities) occurs by chance or not. The data used to illustrate these methods are shown in Figure 1. These data were abstracted from a longer series (Closing prices, soybean meal, 4/1/80--4/30/81...
Detecting hidden signals by Clifford J. Sherry, Ph.D.
ARTICLE SYNOPSIS ...Detecting hidden signals by Clifford J. Sherry, Ph.D. Do you have a signal, such as a particular pattern of price movements, that is buried in noise like random fluctuations or seasonal trends? If you believe this signal is time-locked to some internal event, like a particular pattern of price changes, or an external event, like the beginning of a trading week or month, you may be able to use a relatively powerful technique called averaging to detect your signal. Averaging is done with a special-purpose computer and is used in such disciplines as neurophysiology or electrical engineering to d...
Skill or luck? by Clifford J Sherry Ph.D.
ARTICLE SYNOPSIS ...Skill or luck? by Clifford J Sherry Ph.D. Dr. Sherry examines the statistical concepts of randomness and independence as they affect prices in the markets. He outlines a method of determining whether or not prices are random and/or independent by using probability density functions, quantile analysis and chi-square methodology. Gambling, legal or illegal, whether in a Vegas or Atlantic City casino, a carnival, or the backroom of your neighborhood club, is based almost totally on chance or 'luck.' This is especially true of games like Wheel of Fortune, roulette, slot machines, and dice games ...
Random walk prices by Clifford J. Sherry, Ph.D.
ARTICLE SYNOPSIS ...Random walk prices by Clifford J. Sherry, Ph.D. Are your trades based on skill or luck? Sherry's simple ""Skill Score"" will show you how to determine whether your decisions are based on your trading prowess or the luck of the draw. A recent article by Tomek and Querin (Journal of Futures Markets 1984) highlights some of the questions that speculators and, particularly, technical analysts have or should have about how commodity prices are generated by a random walk process. This means that they believe that price generation is random and independent. A common example of a random and indepe...
Detecting dependence part 2 by Clifford J. Sherry, Ph.D.
ARTICLE SYNOPSIS ...Detecting dependence part 2 by Clifford J. Sherry, Ph.D. In an article in the last issue (Stocks & Commodities, April 1986), I outlined a means of detecting whether dependence existed between prices in a time series. To read this article, you should recall the method used in that article to create price change frequency histograms and divide them into classes. Also, to avoid repetition, the exemplary data series from that article will be used. Once you have generated the price change frequency histogram and divided it into the appropriate classes, like thirds, and assigned each price change ...
The n-method by Clifford J. Sherry, Ph.D.
ARTICLE SYNOPSIS ...The n-method by Clifford J. Sherry, Ph.D. Are large increases or decreases in the price of a given stock or commodity evenly distributed throughout the trading day? The trading week? The trading month? Or are there detectable patterns in these price changes? I recently demonstrated that, for soybean meal, a large price increase is more likely to occur on the first day of a trading week than on any other day. I used the triggered price change histogram (described in detail in Stocks & Commodities, June 1986) to find this pattern. The histogram is shown in Figure 1. Now, you can take this find...
Detecting a dependent process by Clifford J. Sherry Ph.D.
ARTICLE SYNOPSIS ...Detecting a dependent process by Clifford J. Sherry Ph.D. If you know the price of a commodity today, can you predict what the price will be tomorrow? Can you predict whether the price will increase or decrease? Dr. Sherry proposes a statistical method that allows you to determine which prices are random and/or independent. If you know the price of a commodity today, can you predict what the price will be tomorrow? A week from tomorrow? A month? Can you predict whether the price will increase or decrease? By how much? The answer to these questions depends on who you ask. Some people, like te...
Gambler's Paradox by Clifford J. Sherry
ARTICLE SYNOPSIS ...Gambler's Paradox by Clifford J. Sherry If you know the price of a commodity today, can you predict the price tomorrow? A week from tomorrow? A month from tomorrow? Can you predict whether the price will increase or decrease and by how much? The answer to that question depends on who you ask. Some people, like technical analysts, who use such things as charts and moving averages, believe that you can. Others do not. One reason this question is so difficult to answer is there is no general agreement about how commodity prices are 'generated.' If the underlying 'process' is random and/or indep...
A simple analogue of auto- and cross-correlation by Clifford J. Sherry
ARTICLE SYNOPSIS ...A simple analogue of auto- and cross-correlation by Clifford J. Sherry If you trade commodities or stocks and if you expect to make a profit, you are making the tacit assumption that you can predict the future price of your commodity or stock. Traders often need to know if time series of commodity or stock prices are cyclic and, if they are, the extent of the cycle. It is also important to know if two time series are interdependent. Interdependency can be between two commodity prices, if you want to play the spreads, or a series of commodity prices and some other time series, such as the Com...
Prediction by Index by Clifford J. Sherry, Ph.D.
ARTICLE SYNOPSIS ...Prediction by Index by Clifford J. Sherry, Ph.D. The Composite Index of Leading Economic Indicators is a summary measure designed to indicate changes in the direction of aggregrate economic activity. The Index measures the average behavior of a group of 12 economic time series that show similar timing at business cycle turns. They represent different activities or sectors of the economy. The Index was first developed in the 1930's by the National Bureau of Economic Research and has been published since 1961 by the Department of Commerce in Business Conditions Digest. The Index tends to lead a...
Malfunctioning Computers: Who Pays? by Clifford Sherry, Ph. D.
ARTICLE SYNOPSIS ...Malfunctioning Computers: Who Pays? by Clifford Sherry, Ph. D. You have just decided to purchase a new computer, peripheral (disc drive, printer, etc.) or software package (program). How should you proceed? First, you should stop and do some careful thinking and possibly some research. You need to decide exactly what you want your hardware (computer, peripheral) or software to do. For example, with many small computers, time may be a factor. Two computers can perform the same function, but one takes seconds, while the other takes minutes. If you require the task to be performed in seconds, th...
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