Abstract

Share-o-matic is an IT application system which supports profitable long-term investing in securities, short-term trading (intraday trading) is not supported.
The application uses historical stock prices on a weekly intermittency as input for assessment and analysis exclusively, everything else - such as trends, psychological influences, opinions - does not affect evaluation. The application presupposes that all essential information is subsumed in prices.
Fundamental characteristic figure for assessment is relative strength. As the base for decision making market assessments are calculated. A market is an aggregation of securities by geographical or other logical considerations. The second most important decision criterion is the relative strength of securities at investment date.
Parameterized assessment techniques enable mapping of different characteristics and behavior patterns of markets. Optimum techniques (best practice) are determined by Share-o-matic analysis. This analysis uses machine learning algorithms to identify well performing parametrizations for later predictions. The main objective is yield optimization. Techniques which have been worked out by long-period learning are validated by testing with recent past data.

Technical Analysis

The Share-o-matic-technique compiles criteria for investment decisions by means of multilevel technical analysis based on historical share prices. Technical analysis constrains to the working-out and formulation of characteristics which are suitable for a reasonable and successful acting at stock markets in any free-market economy. The first move is to investigate markets which may be structured regional or in any order. Markets are assessed by their relative strength and there is an ongoing review to find out when it is advantageous to invest in a market or it is better to detach from a previous investment. For market assessment a scaling from 0 up to 100 percent is taken, which shows how many market members have advanced in the space of the comparison period. Buy and sell signals will be produced, whenever market assessment exceeds or falls below a defined threshold level.

The adjusted market method (26-60-40) implies that a half year´s comparison is accomplished with the market members. If more than 60 percent advanced, the market would be assessed as 'with good prospects', less than 40 percent identify a weak market, in-between 40 and 60 percent it is considered as non-uniform and it is recommended to hold existing positions (regardless of long or short). A buy signal is produced, when 60-percent-line is subtended from market curve upwards (this as well produces a sell signal for an existing short position). Vice versa sub-tending 40-percent-line downwards means a sell signal (= buy signal 'short').

Fundamental Analysis - Decision Making

When a buy or sell signal occurs in a market the last open transaction is closed and a new transaction is opened, in any case a changeover to the opposite positioning is carried out simultaneously. The selection of securities derives from the defined selection method. An extra relative strength measures and sorts the several market members. This relative strength can be composed out of up to three partial relative strength figures. Furthermore the method arranges amount and distribution of the investment among the single market members. On the basis of these parameters a buy transaction is opened, which will be assessed according to profit/loss and yield.

The adjusted selection method '26/52 - B1/W1' enforces the relative strength of the particular securities to be calculated as an average of a half year and a whole year comparison. So this figure contains a longer term observation period, the developing in younger past obtains heavier weight, because it is integrated twice in the figure. The second parameter set (B1-W1) describes the way of selection: when a long signal comes up the planned asset per invest is invested in the currently technical strongest instrument. In the same way everything is bet on the currently technical weakest instrument, when a short signal comes over. This selection may appear as some kind of trivial, but in the majority of cases it achieves convenient results. For risk spread it makes sense to invest at most in the three fundamental strongest/weakest instruments. Since year-end 2014 the fundamental instrument selection is driven by the Average Relative Strength (∅-RS), which is the arithmetic mean out of all 40 relative strengths between 13 and 52 weeks. The quality of this key figure has proven as high to such an extent so that it is applied both for the weekly assessment on Mondays after closing bell in New York (10:00pm EST) and for new market analyses generally since then.

Of course, Share-o-matic fundamental analysis is not fundamental as defined classically, because it is derived from historical prices (technically). The term is used to establish a border between market analysis and analysis of a single instrument. We assume that the current prize subsumes the entire fundamental information of an instrument, in this respect the term 'fundamental' is reasonable.

Term Investment

Naturally, it is not easy to trust in a relatively strict straightforward system when making an investment decision. On the one hand there is skepticism, because the system works with historical informations, so why should it be able to recognize future volatilities? On the other hand it is held that a strict algorithm can not have the intellect, which should be imperatively necessary for decisions of that kind. Market decisions are usually made by humans, they are backed by evaluated informations and knowledge about causal connections. It is not easy to imagine that this behavior can be represented by a machine. But it works. Especially unemotional proceeding of a machine excludes emotionally driven failures.

It is like that, things do not suddenly change day-to-day. Therefore it makes sense to maintain rules, when past proved its profitability. Certainly, there are changes at markets all along. But this takes place fluently during longer time periods. For this reason Share-o-matic adopts continuously the rating of backed assessment methods. The mixture of conserving best practice combined with the auto-learning mechanism is the gist of the matter.

When signals are submitted a good many times cognitive dissonances occur, when system processed suggestions are investigated. Especially the adjusted selection method (buy best - sell weakest), when switching to long leads to suggestions of securities which rose pretty well recently, while when going short system usually recommends securities, which suffered already hardly last. This produces discomfort, because the potential of the already strongly attended or declined instrument is not estimated as too high in the same direction. This assumption mostly is not justified, for to that point in time the market still resides in reversal phase, there is neither hausse nor baisse. Why should an instrument, which proved strength in this indifferent period, suddenly become weak, when general market psychology turns into a euphoric direction. Vice versa when a short signal appears it has to be doubted that a weak instrument against the trend suddenly gets wings, when decrease of market sentiment continues. Therefore it is recommended, to diversify the risk spread not too wide, because this may well lead to significant performance losses.

Profit-Taking

This should be the most convenient phase of the whole process, but more often than not the most difficult one, because here psychological aspects are effective in a very high degree. This may happen in two directions. If the engagement was successful up to the moment, you are not likely to give it up, because you assume this may go on and on. Is your transaction down, you tend to wait a little bit to go out, when at least the neutral line will be touched. Accommodating these emotions most often is the safe way to draw in more losses or less profit. In such situations you must show yourself that a reversal of trend is taking place. It is in all probability that the new trend will be retained than suddenly will change again to the other direction. Certainly this may happen, but hardly it will. The advantage of Share-o-matic technical analysis is its pre-cyclical behavior. Techniques and methods, which do not work this way, will be identified by ranking and then will be sorted out.

There are numerous figures and indicators for technical analysis. Almost all have a crucial disadvantage: at the best they are running with the cycle. Signals are submitted, when it usually is too late. This may perform well in a high, if you are successful in jumping on the bandwagon, but jumping off may be more difficult. Probably you will detect that the train has left station some time ago an it is running too fast for a jump off.

Therefore we advise to follow sell signals consequently. Only a realized profit is a profit. Obviously, equally a realized loss is a true loss, but it is better than a realized excessive loss.

Going short

Some of us might not like it to take advantage of falling prices in rougher stock market times. But the global financial crisis has shown that this way well opportunities might be discarded. Share-o-matic recognized in all markets with the implemented techniques the doom and changed from long to short in time before crashing. This will happen again and again, perhaps next time it might not be initiated by collapsing real estate markets. There can be no up without a prior down.

Annotations to calculation of short transactions:

The difficulty in calculating shorts is that we cannot work with a time value,because we cannot predispose the end of transaction date. To get preferably close to short functionality without becoming too speculative, we determine lever 1 for buy price. Now, lever changes with varying underlying instrument. That means, if the underlying instrument was at 100 when its short was purchased and comes down to 90, this would produce the same effect as going down from 90 to 81 or from 50 to 45. Being at 50 already a lever of 2 is reached and gain is approximately 100%. Conversely a doubled base value is considered as a total loss, because there is no time value left when selling the short. Therefore, when current price exceeds purchasing price it has to be calculated linearly.
For Longs the percentage difference is generally computed with the formula diffPct = (SP / PP - 1) * 100%.
For Shorts we need different formulas:
Decreasing underlying instrument: diffPct = (PP / SP - 1) * 100% - that results in 25% for a decrease from 100 down to 80.
Increasing underlying instrument: diffPct = (1 - SP / PP) * 100% - that results in usually anticipated and realistic 20% loss for an increase from 100 up to 120 and to a total loss when doubling up to 200 (hopefully this will not happen too often), because the base instrument would have to be purchased at double price to serve the naked sale.
Needless to say that this simulation is mathematically fuzzy, but it is getting fairly close to reality and we have to deal with it anyway.

Implementation

Share-o-matic processes each market with two standard techniques and one "best practice" technique.
Standard techniques evaluate defined markets using a relative strength distance of 26 weeks. Buy signals arise, when a 60% line is intersected from lower to upper (price of more than 60% of market constituents did rise during past half year). Intersecting a 40% line from upper to lower generates a sell signal. At that date the technique recommends purchase / short-sell of fundamental strongest / weakest instrument. Second technique takes best / worst two instruments. "best practice" techniques have been determined by Share-o-matic analysis. They are using relative strength distances, buy and sell lines and fundamental methods, which would have lead to optimum results , if had been used in past 7 up to 10 years. These techniques are marked with an @ in ranking, signals should attract special attraction, because they usually achieve better results. It can happen that a "best practice" technique is out-ranged by a standard technique. This would-be inconsistency has two reasons: to the one hand markets are dynamic (composition varies with the time), on the other hand standard techniques operate strictly forward, decisions will not be revised when market composition is modified (no recalculation!) whereas "best practice" techniques determine transactions retrospectively. Particularly this happens, when weak papers, which have been short-sold in standard, are taken out of an index and so can not be considered within retrospective computation.

Standard method "26-52" (calculate half and full year changes of prices in percent and take the arithmetic mean of these values) is generally applied to fundamental evaluation. Analysis of alternative methods did not result in significantly better findings. So with up to now perceptions there is no need to increase complexity for nothing.That confirms our experience: smart timing is much more important than perfect selection. First think about "when?" before thinking about "what?".

Technique Analysis

The objective of Share-o-matic is the ascertaining of optimal investment techniques for geographical or otherwise specified markets. On these sites two standard techniques and one market specific technique are processed. These techniques - with few exceptions - provide satisfying or even excellent strategies, but they are not necessarily the best. The core of Share-o-matic is the technique analysis for markets. Using variable methods this analysis identifies techniques, which would have lead to optimum results for analyzed markets, if they had been used in the recent past (7 to 10 years back). Obviously there can not be a guarantee for an optimum performance in future, but it is very unlikely, that they will deliver poor results. This is a key sentence of the investment philosophy of Share-o-matic.

Stops

Share-o-matic techniques basically do not work with stops, this depends on the individual investor's attitude about chance and risk. In extrem cases this may cause a total loss, if a complete short invest gets caught in a bear trap. This is intentionally admitted to strain off hazardous techniques. Those techniques will send signals no longer because asset is burnt up. This in turn is important for portfolio simulation. As a matter of course we guess trading with variable stops as an absolute necessity.
Stops are displayed in [Signals] and open [Transactions] (optionally) to keep track of unfavorable trends.

Future Prospects

The features below will be realized soon:

Optimzing of technical best practice methods
The current version provides relative strength distance settings 13, 17, 21, 26, 30, 34, 39, 43, 47 and 52 weeks.
A project was implemented to find out whether more detailed distance scaling might supply significantly more effective best practice techniques.

Re-calculation of sector and line markets
Having performed actualization of these markets (partially considerable changes) best practice analysis will be performed. This might well last a couple of days.

Proposals and ideas are always welcome (-> mail@share-o-matic.com).