Black Box Investing Update

Sorry this is a stock blog, if you don't like stocks it may be boring.

One day I was listening to CNBC on a report about how far behind the US was in Math vs the rest of the world. The person they were talking to happened to be from a company called Black Box Investing. They were saying how they were donating money to "Math for America" (or something like that). They hire a lot of PHDs in math to analyze stock charts and figure out when to buy and sell them. They say they have trouble finding enough PHDs to work for them so they do a lot of overseas hiring.

Net, I thought the idea was neat so I subscribed to their service. I monitor their suggestions about stocks I already watch but they issue warnings on what stcks you should buy each day so I decided to start a test to see how they do before I take any of their advice. What is neat is they do track historically for you how the stock previuously performed when these conditions have occurred before.

Test Design:
They reco stuff everyday, but I only keep track of things they suggest on friday after the close. I figure I am busy so I could have all weekend to do some homework on these companies and see which I really think will go up. I also take the following monday closing price as my first data point so that you have all day to get into the stock w/o worrying it will jump over the weekend before you can even buy any (see Mad Money).

I am 3 weeks into the test and here are the results of the first batch.

These are stocks that were suggested to be bought on Friday 4/13/07. They are broken into 3 groups based on 3 different models that suggested a buy.

Group #1

Background:
The Stochastic Oscillator is a momentum indicator that shows the location of the current close relative to the stock's recent trading range. The Oscillator is made up of 2 lines. The first is called the %K line which moves between 1 and 100, where 1 represents the bottom of the range and 100 represents the top. The second line, called the %D, is simply a moving average of the %K line. When the Stochastic Oscillator rises above the 80 level, the stock is considered "overbought" and when it falls below the 20 level it is considered "oversold."

Data:
On this day there were no 5 star "buys" so all of these are 4 stars (I will later track 3,4,5 star perfomance once I have more data).

After 1 week:
Average Gain: 5.2% (S&P 500 gained 1.1%)
Median Gain: 3.1%
High: 28.9%
Low: -3.0%

After 2 Weeks:
Average Gain: 4.2% (S&P 500 gained 1.7%)
Median Gain: 4.0%
High: 17.4%
Low: -3.6%

After 3 Weeks:
Average Gain: 4.8% (S&P 500 gained 2.5%)
Median Gain: 3.4%
High: 23.5%
Low: -0.8%

Not bad data but you'd have to do some research to find the 1 or 2 that will jump over 10% out of the 10 stocks I followed. On the plus side nothing got killed, so you could try it w/ low risk and bail if the stock does not move. You'd have to trade this model (and most) you really couldn't buy and hold hoping for a 10 bagger when the model is based on how far above or below the recent average the stock is trading.

I'll keep and eye on this as I anaylze later weeks data.

Group #2

Background:
Developed by John Bollinger, Bollinger Bands are an indicator that allows investors to compare volatility and relative price levels over a period time. The indicator consists of three bands designed to encompass the majority of a security's price action. The middle line is a simple moving average. The upper and lower bands are the moving average plus or minus standard deviations. Standard deviation is a statistical term that provides a good indication of volatility, ensuring that the bands widen or shrink according to the stocks current level of volatility.

Data:
I'm not going to summarize, these 10 stocks lost around 1-2% at each of the 3 weeks. Only 3/10 were up after 3 weeks. It's even worse when you see the S&P 500 gained 2.5% over that time.

Group #3

Background:
MACD stands for Moving Average Convergence Divergence. The MACD is the difference between two exponential moving averages, typically the 26 and the 12. Our Black Box System will often modify this setup to present a more accurate MACD signal. A second, exponential moving average, called the "signal line", is plotted on top of the MACD. A buy or sell signal is given when the first line crosses over the signal line.

Data:
Same as group #2, only 1 of the 4 made money after 3 weeks.

Overall I like the program, they do a lot of the technical work that I do not have to for. But it is a Black Box that treats everything as numbers so you have to do some "Jim style" research on your own to figure out which are good companies.