News & Updates:

Like the website?
Recommend Us To a Friend

OTHER FACTORS INFLUENTIAL

The writer has not attempted to present every formula ever invented. The formulas described are felt to offer a representa­tive sampling of the most practical or widely publicized types to enable the investor to select whatever features he may prefer. There are numerous possibilities for other plans. A good source of future formula methods might well be in market "timing" techniques such as the "confidence index," one or another of the breadth indexes or advance-decline indicators, or the strength measurements issued by Lowry's Reports. These technical approaches to the market could undoubtedly be adapted easily to the formula principle. A formula based on current stock yields would probably have given good results over past years.

It is possible that a good formula could be built around the loan-deposit ratios of commercial banks, the underlying assump­tion being that the Federal Reserve Board—which influences this ratio by its actions in the money market—is a major in­fluence on the stock market. Although the relationship of business cycles to stock market cycles was distant during the war and postwar years, it may be that a formula based on business indicators might again be profitable in the future. All these areas, of course, would require detailed investigation, but the important point is that the reader need not feel restricted to the formulas that have been devised in the past.

In order to show how an original formula may be constructed with little trouble, this writer has devised and tested a modification of the constant ratio formula, based on odd lot indexes, that would have given adequate results over a number of years. Like the "compromise plan" described on page 77, it is simply the constant ratio plan with an added feature, based on odd lot trading, to improve results.

As used by specialists in the study of odd lot statistics, the significance of these extends far beyond that indicated by the use made of them in this formula.⁴ For the present purpose, it will be sufficient to point out that studies conducted by Garfield A. Drew have shown that enthusiasm of odd lot investors for stocks at certain periods may signal danger in the market, while an indifferent or bearish attitude may signal a market low point. Each day, the number of shares bought and sold in odd lots on the New York Stock Exchange during the preceding trading day are released by the Exchange and published in leading news­papers. The index used in this formula is the Odd Lot Balance Index originated by Garfield A. Drew and regularly published by Drew Investment Associates of Boston. It is a three-month moving average of the ratio of odd lot sales to purchases, mul­tiplied by 100. An index, for example, shows that sales exactly equalled purchases; a figure of 90 means that sales were 90 per­cent of purchases. The higher the index goes, the more stock odd lot investors are selling relative to their purchases, and the lower it goes, the more stock they are buying relative to their sales. For this formula, the significance of the figures is that when odd lotters are heavy sellers, it is time to increase stock holdings, and when they are buying heavily, it is time to sell some stocks.

Related terms include stock market traders and stock market indicator.