Analysis wanted...

[Gringotts Bank]

Is it a composite of managed fund unit prices?

 

[systematic]

EWI (Equal Weight Index)?
Suspense is cool.

 

[CanOz]

Yeah, i'm thinking it must have something to do with the way the index is weighted. He has made a change to it somehow to reflect the way that perhaps the US indices are weighted, or re-weighted.

CanOz

 

[skyQuake]

As long as it doesnt end like

Surprise guys! Its a random number generator that looks a lot like the XAO

 

[CanOz]

Could it be he has changed the way the index is calculated to a price weighted index instead of a capital weighted index?

CanOz

 

[Trembling Hand]

Is it the XAO, taken at some point in time (e.g. 2007) that retains all the original stocks at that point in time until now? That is to say, it wouldn't include any stocks added or removed since that snapshot was taken?

Edit: would that make sense though? Given the positive bias of the index (via removal of the laggards) you'd expect the chart to be trending below the XAO?

Very close.

Here is a few quick pics,





Ok I've run out of time again but I'll put you all out of your misery and come back tomorrow and add more.

The original Instrument, XAO_NOW, is a price sum index of the current XAO. So thats equal weight. All prices summed to get the index OHLC (thats why the daily bars are little funky), using the CURRENT XAO constituents. My main point being the current XAO has little to do with the XAO of 2005 to 2007. From my records there is nearly 160 different companies in the current XAO. Its not different on a cap weighted bases because the top stocks hardly ever change but its a completely different market from 06.

The red line is the XAO calculated the same way as the first, that is equal weight price summed, adjusted at 2007, 2008, and 2009 as per the additions and exclusions of the XAO. Few points to make but the main one being have a look at how far off all time highs we are with the XAO_NOW and how far we have come from the 2009 lows.

Come on bears. ASX is healthy.

 

[kid hustlr]

There is a unique flaw in Aussie indexes, in fact most Asian indexes, that to me makes looking at the XAO chart and making portfolio decision F'in silly. And I'm not even a systems trader.

The S&P500 also re balances every quarter, why is this flaw only unique to Aussie Indexes?

 

[tech/a]

You make a very good point and one Ive not considered directly.
If using an index filter for systems trading it could have an effect on
either pausing or completely stopping a system from trading.

It could also switch buying on at different levels.
How much it affected individual systems would need to be tested.
I dont know that it would be all that different.

 

[Trembling Hand]

The S&P500 also re balances every quarter, why is this flaw only unique to Aussie Indexes?

Our market is top heavy unlike US/Europe. Once you get outside the to 10-20 market cap slips very fast.

 

[Gringotts Bank]

How do you use this to make trading more profitable? How is this better than using the XAO?

 

[Trembling Hand]

How do you use this to make trading more profitable? How is this better than using the XAO?

Thats my point. Should you be using the XAO to figure out the strength or weakness of the market?

Who said that looking at the XAO IS a good idea? What edge does looking at a top weighted continually changing index have to do with trading an individual stock or a group of stocks not represented by the weighting of the XAO?

Why would you look at an index level 3 years ago that has nothing to do with the current collection of stocks. Let alone one 5 or more years ago? When/if we take out an important level what does that mean? Was it really resistance/support/High/Low when 25% of the stocks that set it don't trade any more!!??

Why look at the XAO with lines all over it when the only thing that moves it is practically 4 banks, 4 miners, a telco, and a few retailers - stocks that you'll probably never trade. Meanwhile you have hundreds of stocks moving along nicely that will never nudge the XAO either way.

 

[Gringotts Bank]

Thats my point. Should you be using the XAO to figure out the strength or weakness of the market?

Who said that looking at the XAO IS a good idea? What edge does looking at a top weighted continually changing index have to do with trading an individual stock or a group of stocks not represented by the weighting of the XAO?

Why would you look at an index level 3 years ago that has nothing to do with the current collection of stocks. Let alone one 5 or more years ago? When/if we take out an important level what does that mean? Was it really resistance/support/High/Low when 25% of the stocks that set it don't trade any more!!??

Why look at the XAO with lines all over it when the only thing that moves it is practically 4 banks, 4 miners, a telco, and a few retailers - stocks that you'll probably never trade. Meanwhile you have hundreds of stocks moving along nicely that will never nudge the XAO either way.

Because on average, 70% of smaller stocks will follow the lead of the bigger companies that constitute the XAO. Not many small co.s will go against the trend set by the big co's.

 

[Trembling Hand]

Because on average, 70% of smaller stocks will follow the lead of the bigger companies that constitute the XAO. Not many small co.s will go against the trend set by the big co's.

Oh you are missing the point. Which is surprising, as a system trader, are you not looking for the stocks that outperform everything else.

 

[sammy84]

Isn't that why we should always keep an eye on the XSO as well?

 

[skc]

Thats my point. Should you be using the XAO to figure out the strength or weakness of the market?

Who said that looking at the XAO IS a good idea? What edge does looking at a top weighted continually changing index have to do with trading an individual stock or a group of stocks not represented by the weighting of the XAO?

Interesting comment.

Most traders sort of understand that context is important when it comes to trading shares. The performance of different technical analyses varies depending on the market context... and many traders go to the index chart to seek context, rightly or wrongly.

IMO, the better approach is to adopt a sector-view. Looking for a long entry at David Jones? Take a look at what the discretionary retail sector is doing. Get confirmation there rather than from XAO that really doesn't mean a great deal due to its methodology.

 

[Trembling Hand]

Isn't that why we should always keep an eye on the XSO as well?

Mmmmm. I wouldn't be happy with that. What you have there is stocks from 101 to 300 out of the 500 or so XAO. Its basically the middle of the XAO but its still a jumble of stuff that comes and goes and is still cap-weighted.

 

[Gringotts Bank]

Oh you are missing the point. Which is surprising, as a system trader, are you not looking for the stocks that outperform everything else.

Normally I let the individual stock tell me when to sell. But if I get up one morning and the DJI closed down2%, then I know th XAO is very likely going to be at least -1%, and that means that 70% of the stocks in my portfolio will come off maybe -5%. I overrule my system a lot.

You keep referring back to what I said about the XAO being overbought. Since then it's put on 100 points. So it was a bad call.... so what?

 

[peter2]

Interesting discussion TH.
No doubt the index with the weakest fundamentals is the DOW. It's importance is due to the fact that all the commentators report it. DOW down 129pts drives sentiment. I like to look at various sector indicies also but in the ASX these are dominated by one or a few stocks which makes them of limited value.

Perhaps we should make up our own indicies that better reflect the type of stocks we trade. It would provide a better benchmark than a general index. Making indicies and charts is very tedious work without the right software. This makes me use the XAO as my default benchmark. For better or worse as you (TH) have rightly questioned.

 

[Trembling Hand]

Normally I let the individual stock tell me when to sell. But if I get up one morning and the DJI closed down2%, then I know th XAO is very likely going to be at least -1%, and that means that 70% of the stocks in my portfolio will come off maybe -5%. I overrule my system a lot.

Maybe - maybe not. You would think if your system is more right than wrong your holdings should be in the 30%. Therefore stuff what the DOW and The XAO did.

You keep referring back to what I said about the XAO being overbought. Since then it's put on 100 points. So it was a bad call.... so what?

Nah I don't think I have mentioned that today. And only poked you yesterday cuz you were being a nut. :

 

[sammy84]

Mmmmm. I wouldn't be happy with that. What you have there is stocks from 101 to 300 out of the 500 or so XAO. Its basically the middle of the XAO but its still a jumble of stuff that comes and goes and is still cap-weighted.

Makes sense. So then we have to also use the XMD -the mid cap 50 index. All very interesting. Basically we can't use one index as an overall filter.