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CAPS5StarIndex (< 20)

Whiplash!

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January 12, 2007 – Comments (5)

The CAPS5StarIndex portfolio has been extremely volatile since the last rebalance - enough to give one whiplash! Just days after the rebalance, it plunged in score until it was in subzero territory, where is stayed for several days. Then today, it's score rocketed upward by +181.64 points. That earned it the 1-Day Hottest Player charm and a lightning bolt to boot! As nice as the charms are, I'm glad to see it back in positive score territory, meaning that 5Star stocks are outperforming the S&P500 for the time being. For the record, here are today's stats for CAPS5StarIndex:

Rating: 58.91 (+56.56)

Rank: 8163 out of 19864

Score: 72.63 (+181.64)

Accuracy: 42.95%

All-Time Best: ALY +49.14

All-Time Worst: SCU -36.06

In comparison, the CAPS1StarIndex has been keeping its head above water for some time. Here are today's results:

Rating: 88.16 (-0.41)

Rank: 2352 out of 19864

Score: 306.38 (-55.02)

Accuracy: 52.73%

All-Time Best: EBOF.OB +66.68

All-Time Worst: SYX -80.29

I have noticed that CAPS1StarIndex still seems to have a largely inverse relationship to CAPS5StarIndex. (I wish I could show the graph overlays to those reading this - you can semi-recreate it by viewing the chart for CAPS5StarIndex, then switching over to the chart for CAPS1StarIndex and try to mentally overlay them - they move in near-opposition.) I'm still not fully sure of the reasons for this, but it seems to indicate that the direction of the overall market is pushing both of these ports around - since CAPS5StarIndex has solely outperforms and CAPS1StarIndex has solely underperforms, they move in opposition. What has me intrigued is that this type of movement may have nothing to do with the Star ratings per se, but rather the call direction. Would two ports that took 3-Star stocks (or a random selection) and called outperform vs. underperform on them show the same opposition? I'll be keeping an eye on this correlation, but for the time being, both the CAPS5Star and CAPS1Star indices are outperforming the market on a score basis.

5 Comments – Post Your Own

#1) On January 13, 2007 at 9:21 AM, TMFSpiffyPop (99.37) wrote:

Love your work. Thanks for the thoughtful explorations. Fool on. --David

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#2) On January 18, 2007 at 4:52 PM, seanleckey (99.78) wrote:

I believe that the 5 star index basically tracks small caps in general.

Consider the following:

http://img50...lvsspkm1.jpg

IVM is the ISHARE RUS 2000 INDX.

IVV is the S&P index.

Plotted is the CAPS score of IVM (starting mid october) to now (1/18/07)

(time period chosen to correspond to 5 star lifetime)

What I notice is that this score chart looks darn near identical to the 5 star index score chart.

Why is that?

1) TMF players like small caps?

2) the CAPS game/scoring overweights or encourages small caps?

Maybe both.

I see nothing inherently wrong with (1). Perhaps a year from now large caps will be in vogue amongst players.

Option (2) should be minimized. Perhaps IVM should be the proper benchmark for CAPS players.

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#3) On January 18, 2007 at 5:50 PM, seanleckey (99.78) wrote:

I would add that the index used to calculate score is irrelevant for computing the score rating, as that is relative to other caps players (percentile basis), and transitively it has no effect on which stocks ultimately get the 5 star rating and therefore has no effect on the "5 star caps index".

I think therefore that the choice of index does not overweight small caps.

A sensible choice of index on the other hand would give the raw score number more meaning however.

that leaves:

"TMF players like small caps" (fine in principle)

and

"CAPS inherently encourages small caps" (not good)

As each pick has the same weighting (i.e. not capitalization weighted or anything), small caps are probably overly represented compared to a "portfolio simulator". Being a poor portfolio simulator is not meant as a negative here, that isn't the goal of CAPS. The observation does suggest a small cap index as a logical benchmark.

All that being said, it could also be that the formula for computing the 1-5 star rating is wherein lies the flaw.

Perhaps the formula doesn't take into account large cap stocks getting more attention than small cap stocks thus making bull/bear ratios fluctuate differently for each class.

MSFT will never get 100% bulls but it is highly probable that 10 random people will be bullish on some random small cap, as there are so many of them.

One can draw the same conclusion about one star stocks. i.e. 5 star stocks and 1 star stocks are small caps who, by luck of the draw, got an aberrant number of picks.

This fits in well with the observation that the 1 star index is the complement of the 5 star index (i.e. complement of small caps).

who knows?

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#4) On January 24, 2007 at 10:14 AM, seanleckey (99.78) wrote:

In order to test the above comment about small caps, I created the player "Caps5StarLargeCa" which tracks 5 star rated stocks with market caps > 20 billion.

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#5) On February 01, 2007 at 11:31 PM, CAPS5StarIndex (< 20) wrote:

seanlecky,

Thanks for your thought-provoking comments, and sorry to be so long in responding - I only check in on the index stats periodically.

You raise an interesting point, and one that I've speculated on in the past - namely, that market capitalization may be influencing the relative performance of stocks at various star-rating levels. (See my gameguru blog post titled "Gauging the Usefulness of Star Ratings" : http://caps....492015868687 )

Perhaps the most intriguing possibility is that because of the variable asset class mixture at each CAPS star level, it is possible for all star levels to simultaneously outperform (or underperform) the S&P 500. A more inclusive benchmark (like the Wilshire 5000) would presumably get rid of this possibility, since the sum total of all stocks at all star rating levels would essentially be "the market".

However, this is likely not a simple market capitalization story, for the following reason. The CAPS5StarIndex and CAPS1StarIndex have a nearly inverse correlation in fluctuations in their score - yet the CAPS5StarIndex picks stocks to outperform, while CAPS1StarIndex picks stocks to underperform. This would be trivial if the two indices were picking the same stocks and just taking opposite positions on them, but (this point is key), the two indices are picking different stocks. Furthermore, both indices are currently outperforming the S&P 500 by a substantial margin. Small caps as a class can't simultaneously out- and under-perform the S&P 500, so the star ratings do appear to carry some additional information. What that information is exactly, I can't yet tell.

Thanks for bringing CAPS5StarLargeCa to my attention. It will be interesting to see how that segment performs. (Perhaps it might be useful to also set up a CAPS1StarLargeCa?)

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