The Strength of GGT Stocks Relative to the Market

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I received an email this morning asking if the GGT stocks were "that much better" than simply picking an index.

Good question.

The answer is -- GGT stocks are absolutely better than a simple index.  Here's the structure and proof:

1) Take the current list of passing GGT stocks.
2) Sort by Open Interest descending.  AAPL will be at the top using the list published here for 8/21.  The greenfield chart for these stocks, sorted OI descending, is provided below bullet 4):
3) Build an index of the top 50 stocks.  I used equal shares only because it's the easiest to demonstrate, but equal weight of prices (say allocate $1,000 per symbol) is possible too.
4) Compare the GGT50 to the index on multiple time periods -- Since Jan 1, April 1, and July 1:

Greenfield 50 Sorted OI Descending:

The GGT50 Index Compared to the VXF:

(Click on the image to enlarge)

Compared to the SPY:

(Click on the image to enlarge)

Note that the left panel of the SPY has January 1 as the starting date, the middle panel is April 1, and the right panel is July 1.

Compared to the Russell 2000:

(Click on the image to enlarge)

Note that the left panel of the IWM has January 1 as the starting date, the middle panel is April 1, and the right panel is July 1.

A few observations jump out at me:

1) On the longest holding period, which is the leftmost panel of each picture, the stocks of the GGT index mirror or are more/less not "explosive" relative to the index.  Once the market begins to move, the GGT stocks appear to move at a higher clip upward than the underlying index (VXF, SPY, IWM).

2) The right panel, which is comprised of stocks from a scan of the 20th of August, is referenced to the start of July.  This shows the biggest contrast, because the stocks selected for the 20th of August are the most "fresh".

3) The middle plot suggests that there is a period where the GGT stocks mimic the index, and after a certain point, the GGT stocks exceed the index.  The visible divergence of the middle plot from IWM starts around the beginning of June, or roughly 50 days ago.  Using the VXF or SPY, it appears to become really visible around the end of April or the beginning of May.

Combined, these three observations point to a requirement that there needs to be some updating of parameters for stocks so that the weakest ones are sold and the strongest ones are kept.

I'll take a look at enhancing this finding and developing some rules around it.  Of course, owning 50 stocks is not practical (might as well as buy an index, right?) but there are ways to mimic a basket of stocks through two related concepts called correlation and orthogonality. 

[Simply put, if two stocks move exactly the same, there is no need to include both of them.  These stocks are said to be highly correlated.  Additionally, if two stocks are selected and only one moves upward but the other does not change, then these two stocks are uncorrelated and can be considered orthogonal.  It is highly desired to reduce a large basket of stocks down to stocks that are uncorrelated and orthogonal while keeping the behavior of the reference basket.]

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Regards,

Paul