FINDING PATTERNS & RELATIONSHIPS WITHIN THE FINANCIAL MARKET
President and CEO of Market Technologies Interviewed Live on AOL’s Sage MarketTalk
Friday, January 26, 2001
Sage Host is Brian P. Stetten (SageCalc) Chief Market Commentator of Sage Online, Inc.
Sage Host: Please welcome Louis Mendelsohn, president and chief executive officer (CEO) of Market Technologies Corporation. For more information visit www.profittaker.com.
Louis Mendelsohn:Good morning, everybody. Welcome to sunny Tampa, Florida, home of the Super Bowl on Sunday. I look forward to talking about my new book on intermarket analysis today.
SageCalc: What exactly is intermarket analysis?
Intermarket analysis is an approach which looks at the relationships of markets to one another, and it examines the effects that markets have on each other from a quantitative standpoint.
SageCalc: For example, how would one financial market impact another?
The globalization of the world economies and the interrelations of the markets that have increased over the recent years has really made the markets part of one overall total marketplace and traders can no longer look at individual markets by themselves. They have to look at the markets they’re trading within a broader context. So you have the influence of Treasury bonds on the stock market, the influence of crude oil, all of these markets affect each other and a trader’s decision making can be improved by looking at the markets within this broader context.
Question: Can you describe your VantagePoint software and what makes it different from other market prediction tools?
VantagePoint uses neural networks, which find patterns and relationships within market data. And for each market that VantagePoint is making a forecast on, it’s actually looking at that market, plus nine other related markets.
SageCalc: What exactly are neural networks and how did you come upon that methodology?
In the mid-1980s, I began to redirect my attention to intermarket relationships and sought out the mathematical tools that I might use to accomplish that and neural networks is one of those tools that I came upon. And what we do is we use the neural networks to find patterns in intermarket data, which are then used to make forecasts of a particular target market that we’re tracking. So for instance, for the Nasdaq 100 Index [$NDX.X], we’re looking at that market, as well as the nine related markets that we follow which are the Dow Jones Industrial Average [$INDU], Treasury bonds, the Standard & Poor’s (S&P) 500 Index [$INX], the U.S. Dollar Index, the S&P 100 Index [$OEX], the New York Stock Exchange Composite Index [$NYA.X], the CRB (Commodity Research Bureau) Index, the Dow Jones Utility Average [$UTIL], and New York Light Crude Oil (NYMEX). We do the same thing for the various other markets that VantagePoint makes its forecasts on.
SageCalc: As I recall, neural networks was an outgrowth of statistical physics. Have any other tools from nonlinear analysis and chaos theory evolved?
There are a number of mathematical tools that are being used in the financial markets for trend analysis. Neural networks is one of them. I happen to like it because it’s completely quantitative and with the complexities of the financial markets today, it’s nearly impossible for an individual trader to look at more than a handful of markets at a time. At best, most traders do it subjectively and often inconsistently, whereas by using a quantitative approach we can find reoccurring patterns in the data, which allow us to make more accurate forecasts of the market that we’re dealing with. In the case of VantagePoint, at this stage, the software first came out in 1991, so we’re ten years into the research & development (R&D) with this forecasting methodology. The software is in the vicinity of around 80 percent accurate at forecasting the trend direction over the next two days. We do this in a very interesting way. Building upon the strengths of a commonly used technical indicator known as moving averages, VantagePoint forecasts moving averages which essentially turns them from a lagging indicator into a leading indicator. This allows traders to be able to anticipate when the markets are about to make a turn from a top to a bottom and vice versa.
Question: Is this software designed for the more active trader?
It can be used by day traders, as well as position traders and there are various ways that the predicted information that VantagePoint generates can be used in that regard. We’re only forecasting for a maximum of four days into the future. We’re predicting the next day’s high and low. We’re predicting a five-day moving average for two days in the future, and a ten-day moving average four days in the future. Those predictions are used to create moving average crossovers where we’re comparing a forecasted moving average to today’s actual moving average, and that’s giving the trader the ability to anticipate when the market is making turns. Admittedly, there is no Holy Grail and I do not expect that anyone ever will be ever to forecast the financial markets with 100 percent predictive accuracy. That’s just impossible.
Question: What led you to develop your software back in the early 80s?
I had been trading equities in the early 70s and got involved in the commodity futures markets in the late 1970s and became intrigued by microcomputers, which had just come into existence and began developing trading software to analyze the financial markets. In 1983, I created the first commercially available software for microcomputers to perform strategy testing and optimization. And then throughout the 80s, I continued to develop more sophisticated software programs and became involved in intermarket analysis. My thinking is that intermarket analysis is simply the next stage in technical analysis, and that traders need to combine a single-market approach which looks internally at a given market with a broader analysis that looks at the relations of related markets and their influence on the market that they’re trading. So it’s not a matter of throwing the baby out with the bath water. Intermarket analysis simply adds to a trader’s arsenal.
Question: How does your software identify the linkages between global markets?
We have researched the various markets and determined the ones that have the most significant effect on a given market and then those markets are analyzed within the software to increase the predictive accuracy of its forecasts. Since there are numerous pieces of predicted information that are made available each day, the trader can take only those trades when all of the information lines up. This helps to eliminate marginal trades and lets the trader get in on moves at their onset. As an example, on the Nasdaq 100 March Futures two days ago, our software had one of its major indicators turn negative on the 24th of January, indicating that the market was making a near term top, even though on that day there was a higher high and a higher low. The nice thing about having the software look at each of these target markets individually is that sometimes one will give an indication earlier than another. In the case of the Nasdaq 100 [$NDX.X] versus the Nasdaq Composite Index [$COMPX], the weakness in the Nasdaq 100 was indicated a day before the Nasdaq Composite showed weakness.
Question: Could you give us your take on the future trend within the domestic market?
Again, we only look ahead a maximum of four days, so that is the window in which the software operates. Each day, of course, it updates its forecasts for the following day. Right now, the software’s indicating near term weakness on the Nasdaq as of January 24, two days ago, and then again of course on the Nasdaq Composite [$COMPX]. The S&P 500 [$INX] is showing a mixed signal as of last night when one of the software’s major indicators turned negative for the first time in eight days.
SageCalc: Negative in what sense?
That indicator is called a ‘Neural Index’ and it fluctuates from a value of zero to one, with zero being negative and one being positive. That indicates whether or not the market is going to be higher or lower over the next two days compared to the prior two days. As I said before, we are around 80 percent accurate at making that forecast. In some cases, even higher depending on the market involved. For instance, on five year T-notes, that indicator is nearly 82 percent accurate. Others are in the mid 70s and high 70s. The nice thing about that indicator is that it’s looking ahead two days, not just looking backwards, like most trend-following technical indicators which are widely used by traders today.
SageCalc: Are there any special hardware or software requirements for the user of your VantagePoint?
No, just a standard personal computer (PC). It takes only a few minutes a day to download the data, update the software and have the daily report of the predictions for the next day available.
Sage Host: Thank you for joining us today Louis! We appreciate your insights!
If anybody would like more information on trend forecasting, intermarket analysis or our VantagePoint software, I invite you to visit our Web site, profittaker.com or you can e-mail me at email@example.com or call Market Technologies at 800/732-5407.