An Idea for Every Investor

“Pure mathematics is, in its way, the poetry of logical ideas” – Albert Einstein

Idea Generation!  Isn’t that the name of the game?  Whether you’re a deep value equity investor looking for mispriced companies or misunderstood situations, or a trend follower in commodities, a stream of compelling ideas allows you to do what you do best.  That is, applying research, experience and discipline to situations that offer a good starting point.

Sounds simple, but many investors will say that consistently generating good ideas is the hardest part of their job.  Great investments come from great ideas.  Producing a stream of good ideas is challenging and it’s next to impossible to have high conviction in a large number of investments in an effort to maintain diversification and good risk management.

Technology solutions carry great promise in this area.  To this point though, most have been based around the aggregation or organization of data sets, screening tools or access to unique data points.  All of these forms are valuable, as they narrow in on information, but they lack the ability to answer specific, customizable questions that can lead to great ideas.  They also lack insights, and the kind of predictive analytics from “Big Data” that everyone has been waiting for.

EidoSearch applies pattern search technology, or search by example, to “Big Financial Data”.  Our software is providing meaningful insights to investors in many areas including risk management, portfolio monitoring and trade implementation.  The power of our technology is perhaps most visible with idea generation, with the ability to generate customizes results to questions like:

• What happens in a rising rate environment, like we saw in 1994, to investment banks?

• My best trade over the past 5 years was a stock that trended a certain way for the previous two years and then fell out of favor with investors.  Are there any stocks in the same sector that look like that right now?

The power of search by example is that the results are accurate and specific.  The other important aspect is that the information is not delivered via a black box signal.  We provide the underlying analytics so that the search provides meaningful data points to the investor to apply their experience and accredit or discredit the results.  The accredited results lead to a solid starting point for fundamental research work.

This morning we’re attempting to provide an interesting idea for all of our readers.  After Friday’s market close, the EidoSearch engine searched through literally billions of patterns to come up with an idea in Commodities (OJ), Currencies (Euro Pound), Indices (Utilities) and Stocks (Marsh & McLennan).  All are 1 month forecasts.  We hope this is a good launching off point.

OJ 1 month forecast

• – Looking at similar historical environments to the current 3 month price trend for Orange Juice
• – OJ is down in 12 of the 15 historical instances dating back to 2002 and the average return in the next 1 month is -3.7%
• – It’s usually down from here (80% of the time), but watch out for the upside risk (per the 2^nd chart).  Two of the three up instances, from October 2011 and November 2012, run up big

Euro Pound 1 month forecast

• – Looking at similar historical environments to the current 3 month price trend for the Euro Pound
• – The currency pair is down in 28 of 35 historical instances dating back to 1999 and the average return in the next 1 month is -0.9%
• – Good risk profile to the Short side:  only 2 instances are up more than 2% historically in the next 1 month, with 10 that are down more than -2%
• – Statistically significant results

 DJ Utilities 1 month forecast

• – Looking at similar historical environments to the current 3 month price trend for the Dow Jones Utilities Average
• – The Index is up in 10 of 11 historical instances dating back to 1999 and the average return in the next 1 month is 3.9%
• – Great risk profile: Only down instance is from 2005, and the return is basically flat (-.23%)
• – This one is about historical analogs

Marsh & McLennan 1 month forecast

• – Looking at similar historical environments to the current 3 month price trend in Financial Services stocks
• – The most similar matches are up in 39 of 51 historical instances dating back to 1983 and 28 of 35 historical instances and the average return in the next 1 month is 4.4%
• – Great risk profile and skew to the upside (visible in 2^nd chart)
• – Statistically significant results, with 85% probability the stock price will be above its current price in 1 month