A.I.M. Users Bulletin Board

[ls7550]

Under Random Walk in principle the past shouldn't have any bearing on the future. The fact that a stock had perhaps doubled or halved in price over the last year should not provide any clue as to how the stock might progress going forwards.

Others believe that Relative Strength (RS) and Weakness (RW) do provide indicators of trends that potentially sustain going forwards. A risk with this however is that strong gains can often turn rapidly and sharply around. Overall however RS has been observed to provide positive overall above average absolute benefit over the longer term.

Conversely however relatively cheap stocks can turn around and go on to make large gains, in some respects being a mirror image of RS - opposite sides of the coin.

Of the two however, Value tends to have lower risk as often much of the actual and potential additional downside has already been priced in.

If AIM buys a stock that exhibits RW (RS) then under Random Walk it shouldn't matter if instead another stock were purchased (or sold) instead. If the trend camp are correct then potentially the stock might continue to decline (rise) further. If the value camp are correct then potentially the lower price stock might be considered as having disproportionate up and down sides, biased in favour of the upside.

If Value and RS are opposite styles, but produce comparable levels of above average results overall then perhaps a change to the previous design I described from using RS throughout to a combination of both RS and Value might be more suitable.

If we apply RS at the sector level then likely that will introduce higher levels of volatility, either the sector AIM will rise strongly in a trending manner or a possible large reversal might occur such that sizeable losses are encountered. The potential general result is higher overall rewards at the cost of higher levels of volatility in the sector 'index fund'.

If then at the higher level (AIM of all sectors) we applied conventional 'Value' type AIM, buying more into the sectors that had fallen, selling out of the sectors that had risen then the two styles of RS (individual sector level) and Value (all sectors level) might compliment each other and potentially achieve higher overall rewards.