Jan

28

There are numerous colleagues on this website who are experts in the sciences including the new member, Uncle Bob, who specializes in polymer chemistry. I felt the least I could do to welcome him was to come up with a grand synthesis of chemistry and markets including work on an atomic theory of company structure, bonds between companies, reactions to various events in the market, conservation laws, new materials constructed from nano engineering, the spin of stocks and markets around various nuclei, a periodic table of companies with families related to their debt equity structure etc.

With seven kids and 85 dependents, and a business always prone to foundering in stormy seas, I thought I might have to limit the scope, and I did by looking at the new insights from chemistry. I found that one cool area is the development of new materials from studies of the reaction of materials at super cool temperatures. Scoles and Toennies and other scientists at the Plexus Institute discovered new and valuable properties of molecules by embedding them in drops of helium at a temperature of minus 459 Fahrenheit. They say that molecules behave like they're in a frictionless world like the behavior of a person who can move easily through a crowd by hopping over everybody else. That's just the thing I figured. I'd like to find some stocks with that property, so perhaps the thing is to study stocks in a super cool environment.

I started by taking all super cool moves of more than 1.5% down in 2006 in the S&P averages. I noted that in 2006 there were just three such changes down 1.7 to 1.9% on 1/20/06 and 5/20/06 and 1.9% on 5/17/06. I will not delve into the point that there has not been a single move of more than 1.5% since 7/20/06 except to say that there is always hope for the Sornprecalebethans, and the longer such a move hasn't occurred, the more hopeful they are without testing that one is due. This meme is percolating through the mainstream media, of course highlighted by the financial weekly, at this moment.

The gist of my studies is that the companies they had there had a very high correlation between the performance of companies during the super cool days of 2006 and the rest of the year. For example, the six DJI companies that performed the best during the three super cool days were MCD, MO, DD, PG, UTX, and HPQ . They showed an average gain of 20% during the last seven months of the year with an average rank of 9th best out of 30. Among the six companies with the worst performance during the three super cool days, namely AA, BA,CAT,INTC,WMT, JPM, the average performance was up 2% with an average rank of 23 out of 30. Such differences in average ranks and means are highly significant.

I will post the full data when the heat of the moment is less. There are many extensions within 2006 to performance in other time periods and to performances at different temperatures, especially super hot days, like 1/03/06, 6/29/06, 7/13/06, and 7/20/06, each of these four being up from 1.5 to 2.9%, and other groups of stocks besides the Dji, and in other years. I note that there was no consistency in the rankings of the 30 Dji companies during the three super cool days. They varied all over the maps, with the standard sum of ranks' tests showing complete randomness. It was only when the sum of the ranks over the three bad days was considered and which was related to the performance during the last seven months, that the highly significant positive correlation emerged.

Thus, we conclude that in helium, at -459 Fahrenheit or in the stock market, stocks show their true properties. If they are very good at hopping over their neighbors during these times, why then, they continue to do so. If they are lethargic at super cool, they will continue to do so when the going gets much better.

We note that Uncle Bob seems to have a benevolent effect on the communities he goes into.

Scott Brooks comments:

I have always felt that one of the true tests of a stock's strength (or whatever investment you choose) is how they perform in a down or super cooled market.

I've always seen stocks like a school of fish…swimming around together in sectors (or regions or asset classes…whatever you prefer). I like to watch what happens when the market(s) pull back (super cool) and see which sector/regions/asset classes hold up the best.

Then, I like to drill down into those s/r/ac and see which individual issues held up the best. I've always used very simple calculations in this process…not enough to call myself a counter…but a form of counting nonetheless.

It's like watching the Discovery Channel and doing a special on undersea creatures…you watch a school of fish and they all seem to move in synchronicity with each other…just like stocks in the same s/r/ac do.

Most people are transfixed by what appears to be the almost coordinated movement of these fish … like they have one mind. I remember discussing this phenomena back in college and how the professor discussed this coordinated movement and what it meant. I can't remember much of what he said about it to tell you the truth, I wasn't really listening. I wasn't interested in the "group," I was interested in the outliers…those fish that didn't move with the group (next time you watch a school of fish, pay close attention and you'll notice the outliers).

I remembered this lesson once I got into this business and have tried to apply it to investing methods.

I have achieved success over the years using this methodology.

Now that I've been turned on to counting, I am applying the scientific method of counting, the significance of these and other theories.

I'm sure that there is a chemical correlation here…heck, one of my undergraduate degrees is in chemistry…but my other undergraduate degree is in biology…and as I'm sure my Uncle Bob can confirm, it's probably wise that I stick to biology and not delve into chemistry … I may have gotten an "A" in both Organic Chemistry ll and Organic Chemistry ll Lab…but I owe those grades to Uncle Bob…that's a story for another day!


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