Where our smart machine calculates that any stock market index, singe stock or exchange-traded fund (ETF) should be priced (the fair value) given the overall macroeconomic environment.
How confident we are in the model value. The higher the number the better! Above 65% means the macro environment is critical, so any valuation signals carry strong weight. Below 65%, we deem that something other than macro is driving the price.
Markets typically move in regimes – essentially the story of the day, the narrative that markets assign to price action. When that story changes - “regime shift” in market speak - the old trades that were making money need to be re-considered. There's a new story (set of positions) in town.
Fair Value Gap (FVG)
The difference between our model value (fair value) and where the price currently is. A positive Fair Value Gap means the security is above the model value, which we refer to as “rich”. A negative FVG means that it's cheap. The bigger the FVG, the bigger the dislocation and therefore a better entry level for trades.
Short Term vs Long Term models
eyeQ’s smart machine creates two versions of every share we model, but the maths and choice of macro factors is the same for both. The only difference is the length of historical data we use.
The Short Term model looks at share prices over the last four months, captures the company’s relationship with growth, inflation, currency shifts, central bank policy etc and calculates our key results - model value, model relevance, Fair Value Gap. The Long Term model follows exactly the same process but uses 12 months of history to make the same calculations.
Why the difference? Because most investors tend to think of their trades in two distinct ways. Tactical opportunities which are short term in nature, and longer-term strategic investments, or “core” holdings. Nearly everyone will have a mix of the two.
A simulated history that can indicate whether a signal has happened before and, if so, how successful it was. By testing trading strategies using historical data from the past 10 years, we assess how they would have performed in different market conditions.
The percentage of trades in your back-test that have made money. Below 50% means you've lost more times than you've won. A 50% hit rate is effectively the same as flipping a coin. Over 50% and the odds are much more attractive.
At any point in time, your trade may be driven by different things – sometimes economic data or central bank policy, other times not macro but politics or big trade flows from corporate buybacks or huge funds. We call these drivers, or factors: market jargon that's basically a way of saying what's moving your position.
Standard deviation is simply the mathematical term that measures how close together a data set is - how far it is from the average (the mean). A large number means the data is more spread out; a small number that it is more concentrated. A very volatile day on financial markets might be called “a 2.5 standard deviation event!” Translation – it doesn't happen very often.
This simply measures standard deviations. A positive (negative) z-score means that number is higher (lower) than average. The bigger the positive (negative) the bigger the deviation from average.
Our custom tool that uses eyeQ model confidence numbers (see above). When macro is doing a good job of explaining price moves, the Volatility Indicator is low. When macro cannot explain why markets are moving, our Vol Indicator rises. A sharp rise (20 points over one month) puts us on alert for investors selling stocks and buying safer assets. Our Vol Indicator has a good track record of pre-empting spikes in the VIX volatility index, the market's most widely watched “fear gauge”.
Real Time Notifications and Alerts. eyeQ uses parent company Quant Insight's “market brain” to extract signals in financial markets. By mathematically breaking down key relationships between the macro environment and the markets you trade, eyeQ highlights key opportunities and risks. RETINA is simply the tool that feeds your pipeline of chosen investment ideas.
The Fair Value Gap mentioned above quickly identifies any dislocation between current market price and macro model value. The divergence signal simply identifies when that dislocation has continued for the last 10 days. Our work suggests 10 days can be the point where the difference between market pricing and macro reality has started to become stretched, and often starts to re-converge.
That 10-day period for a divergence signal is the result of testing eyeQ signals across all asset classes. But averages can be misleading. Some periods of divergence could be shorter, some longer. The inflection signal waits for both model value and market price to turn together. After three days of both turning up (down), a bullish (bearish) inflection signal is triggered. It is shorter because RETINA is trying to find that sweet spot - don't jump into a trade too soon, but early enough to capture the new up or down trend.
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The value of your investments may go down as well as up. You may not get back all the money that you invest.
Equity research is provided for information purposes only. Neither eyeQ (Quant Insight) nor interactive investor have considered your personal circumstances, and the information provided should not be considered a personal recommendation. If you are in any doubt as to the action you should take, please consult an authorised financial adviser.