2. Find consistent movement of specific stocks

Sand Storm! 2010 Act I, Scene 2; Two-Week Trails Show Consistent Movement.

By Two-Week Trails we mean the use of one or two straight line segments to connect a dot at the current location of a stock with its previous locations, one or two weeks earlier; some segments are omitted to reduce clutter. The notion of consistent movement is partly in the eye of the beholder, but carefully following a few individual stock trails should convince you that most stocks keep going in about the same direction once they start moving. Using the idea of stock velocity mentioned on the prior page, this is another way of saying that stock velocity usually changes rather slowly in this normal space. Consistent movement can be useful information for long-term investors, especially if you spot changes in velocity such as marked by the blue or orange background to the dots mentioned at the end of the prior page. These background colors mark reversals in fortune. There is no fortune-telling here, since the background colors were applied after the fact.

This notion of stock velocity is a very important feature of the DiligentInvestor econometric model, and we shall make further use of it for the next two pages. One purpose of the Sand Storm! 2010 animation is to show you these movements, so you can judge the consistency for yourself. The Movement Snapshot taken from the animation illustrates a frame from Scene 2 drawn in almost the same way as in Scene 1. The marginal distributions are removed, and many of the stocks now show a one or two week trail behind them. When the color background of the dot flashes blue, the trail turns blue while the stock return is going up. When the color background of the dot flashes orange, the trails turns orange as well, since the stock return now is going down. The bend between the two straight line segments in the trail usually is small; the stock keeps going in about the same direction, consistently, This appears even more convincingly in the animation than on the example static chart.

Some interesting features appear in Scene 2. Most clearly shown is something like herd or swarm or flock behavior, in that many stocks tend to move in the same direction at the same time. This is no surprise, but the normal space here offers the possibility of measuring and expressing this behavior in a quantitative way. The laws of the flock are three: keep about the same distance from all your neighbors, change your velocity as little as possible, and stay away from the fringes. Are there similar rules for Wall Street?

It is extremely interesting that almost always, a few exceptional stocks move against such a trend. For example, look at the right or high-risk side of the example static chart, between the mean return line and the upper standard deviation line. Here a dozen or so stocks are going nearly straight down toward lower return, marked by their orange trails. Just to their right, about half as many are moving upward toward higher return. The rising stock that has moved past the upper standard deviation line has a green background, indicating that its price behavior at this moment is outside of its normal envelope, and perhaps is a winner. Again, the idea that some stocks move against a trend should not surprise, but the potential for simple display and quantitative measurement is attractive. Finally, please notice that the direction and speed of movement seems to depend on the location within the chart, as mentioned at the end of the Overview and as examined in more detail on the next page.

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