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Ron
Can't you tell which stocks are responsible for movement of an index by
finding out which stocks are most heavily weighted in that index and by
knowing which of those stocks moved the most during the day? And since the
stocks move different amounts from one day to the next, how can you use the
information from a previous day to predict or estimate movement for the
current day? Wouldn't you be better off creating a ratio of each individual
stock to the index and look for short/intermediate/long term trends and do
pairs trading on the strongest vs the weakest?
Kent
-----Original Message-----
From: Ronald McEwan <rmac@xxxxxxxx>
To: realtraders@xxxxxxxxxxxxxxx <realtraders@xxxxxxxxxxxxxxx>
Date: Friday, May 26, 2000 7:23 PM
Subject: [RT] Gen:PCA Oex
This is another example of using Principal Component Analysis on an Index
with some of the stocks that make up the index. In this case the index is
the Oex and I used the ten top weighted stocks from the index. This
enables me to spot what stocks in the Oex are mostly responsible for the
movement of the index. In this case you can see that MSFT, LU, GE, and
INTC were having the biggest impact on the downside for the OEX. While
MRK and XOM were continuing to move higher. This helped me focus my
attention on the drug stocks which have recently moved up contrary to the
rest of the market. I am also finding that this can be useful for "Pairs"
trading. Another advantage this has is that no moving averages or other
variable inputs are required. So no optimization is necessary.
Ron McEwan
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