Stockbank provides training and education materials for its users to learn, trade and hone their investment skills with its proprietary stock analyzing model known as Stockbank Prognosis Index (SPI).
Download SPI Course Material (428kb, 
file)
Table of Content
Stock Analyses
Basically, there are 2 ways to analyze the stock market, which mean, fundamentally or technically. Fundamental analysis involves using quantitative and qualitative methodologies to analyze the individual company while technical analysis involves using statistics to analyze the stock prices with the postulation that the stock market is an efficient market and all the influential news have been factored into the stock market.
Fundamental Analysis
Fundamental analysis can be broken down into 2 parts, namely, quantitative and qualitative methodologies. Quantitative methodologies involve using financial ratios and models to ascertain the financial value of a company which can be said to be on a micro level while qualitative methodologies involve analyzing the company and the industry from a business perspective (non-financial) on a macro level.
Generally speaking, qualitative methodologies are more important than quantitative methodologies. When confronted with contradictory or conflicting circumstances, the former often supersedes the latter.
Listed below are some commonly-used quantitative methodologies:
- Price Earnings Ratio (PER)
- Price Earnings Growth Ratio(PEG)
- Price to Book Ratio (PB)
- Net Asset Value (NAV) or Revised Net Asset Value (RNAV) or Book Value BV) or Sum Of The Parts (SOTP)
- Enterprise Value (EV) / Earnings Before Interest, Tax, Depreciation and Amortization (EBITDA)
- Discounted Cash Flow Model (DCF)
- Dividend Discount Model (DDM)
- Gordon Growth Model (GGM)
- Residual Income Model (RIM)
- Free Cash Flow to Equity Model (FCFE)
Listed below are some commonly-used qualitative methodologies:
- SWOT Analysis
- Strengths
- Weaknesses
- Opportunities
- Threats
- Porter’s Five Forces
- Rivalry among competition firms
- Industry growth rate
- Concentration and balance of competitors
- Differentiation and switching costs
- Excess capacity and exit barriers
- Potential entry of new competitors
- Learning economies and the ratio of fixed to variable costs
- Specialized knowledge
- Potential saturation
- Development of substitute products
- Bargaining power of suppliers
- Bargaining power of consumers
- Rivalry among competition firms
Why did STOCKBANK create a technical analytical model?
Our research showed that most investors would use, on average, at least 3 technical indicators or tools to aid them in their decision-making processes and the influential weightings of their preferred technical tools were constantly shifting due to many factors. These constant changes in the influential weightings at the investors’ whims and fancies engendered inconsistencies in the decision-making processes and also resulted in inconsistent performances.
By using more than one technical indicator or tool, investors simply show that no single technical indicator is accurate or reliable insofar to determine any future stock trend. Therefore, many investors rely on more than one technical indicator to improve their trade accuracies or make lesser mistakes in their investments. However, we do not live in a simple world and investment is not such a simple thing. Using more technical indicators may in fact result in more confusion rather than improve your investment decisions.
Hence, STOCKBANK created SPI with the purpose to inculcate consistencies in the decision-making processes which in turn will lead to consistent and efficacy outcomes.
Introduction
STOCKBANK has created a new breakthrough with a world-class share prognosis model named Stockbank Prognosis Index (SPI). SPI is basically a momentum indicator which predicts the trajectory of each share for the next 10-14 days by assigning each share with an index for the next day on a daily basis. SPI is a precursor to indicate an early metamorphosis in the ever-changing and dynamic stock market by using the most recent data on prices, market sentiment and trading volumes. In a nutshell, SPI attempts to provide the first indication of a coming onset of an uprise or a downturn.
SPI is designed with retail investors in mind to minimize the variability of the lead time between a turn in the index and the actual performance of each share. To put it simply, SPI is built to indicate a direction of motion for a stock within a pre-defined period. The most important thing is not the top line daily index value but the 14-day trend that shows the performance of each share. SPI has been back-end tested and proven to have about 80% positive correlation against the shares in a 100-day time series.
In retrospect, the goal of SPI is to help retail investors and professional traders to reduce their investment risks, thereby, improve their financial positions.
Simple SPI Interpretion
- An index is assigned daily to a share to predict its performance for the next day.
- A positive change from the previous index denotes an increase and a negative change denotes a decrease.
- The magnitude of change in the index is not equivalent to the actual magnitude change of a share but it might denote the inception of a change in circumstances (uprise or downturn) if the magnitude is very huge.
- In order to have a better picture of a share performance, we must also look at the 14-day SPI trend. An index is also being assigned daily to the 14-day SPI trend.
- A 14-day trend index ranges from -10 to 10 which indicate extreme bearishness to extreme bullishness. A neutral or unchanged trend or pattern would be within -1 to 1.
- Last but not least, it usually takes SPI a consecutive 3-day difference (up, up, up or down, down, down) to detect a trend. In other words, it takes 4 bars to indicate a trend (4 bars rule).
Interpretation of SPI (Detailed)
To interpret SPI, we must first look at the 14-day SPI to determine the general trend of the stock, that is, whether it is having a bullish trend or a bearish trend. Then, we will use the recent 4 or 7 daily SPIs to confirm that the 14-day SPI’s trend is correct and sustainable. Thereafter, we will look at the probability to determine the likelihood of that trend or pattern being formed. However, if you are a risk-averse investor, you might not want to invest in a counter with less than 50% probability, as the investment risk is higher when the counter has less than 50% probability.
Listed below are 12 scenarios for your learning.
Scenario 1
Facts:
14-day SPI = 3
Probability > 50% (Probability is the likelihood of an event happening)
ANALYSIS: BUY SIGNAL
The 14-day SPI is said to be having a bullish trend when it has an index of 2 and above. In scenario 1, STOCK A has a 14-day SPI index of 3 and the last 7 daily SPIs are showing an upward trend. Therefore, we can predict that STOCK A’s bullish trend is likely to continue for the next 10-14 days as the probability is more than 50% and we can call for a BUY on this stock. However, if the probability is less than 50%, we will call for a SELL on this stock. This analysis is the same for STOCK B.
Scenario 2
Facts:
14-day SPI = -3
Probability > 50% (Probability is the likelihood of an event happening)
ANALYSIS: SELL SIGNAL
The 14-day SPI is said to be having a bearish trend when it has an index of –2 and below. In scenario 2, we can see that STOCK A has a 14-day SPI index of –3 and the last 7 daily SPIs are showing a downward trend. Therefore, we can predict that STOCK A’s bearish trend is likely to continue for the next 10-14 days as the probability is above 50% and we can call for a SELL on this stock. However, if the probability is less than 50%, we will call for a BUY on this stock. This analysis is the same for STOCK B.
Scenario 3
Facts:
14-day SPI = 1
Probability > 50% (Probability is the likelihood of an event happening)
ANALYSIS: WAIT OR HOLD SIGNAL
The 14-day SPI is said to be having a neutral stance when it has an index of –1, 0 or 1. Generally speaking, a neutral stance is tantamount to a wait-and-see attitude. In scenario 3, STOCK A has a 14-day SPI index of 1 and the daily SPIs are giving a mixed signal. However, the daily SPIs from day 8 onwards are showing an improvement that might indicate the coming onset of an upward trend as the probability is more than 50%. Therefore, we would call for a WAIT or HOLD on this stock for the next 10-14 days until this trend is confirmed when the 14-day SPI is at 2. Conversely, when the overall market sentiment is bullish, we can rate this as BUY based on the 4 bars rule. If the probability is less than 50%, it is best to avoid this counter, as the upward trend being developed is deemed unsustainable.
Scenario 4
Facts:
14-day SPI = -1
Probability > 50% (Probability is the likelihood of an event happening)
ANALYSIS: SELL SIGNAL
In scenario 4, STOCK A has a 14-day SPI index of –1 that indicates a neutral stance and the daily SPIs are giving a mixed signal. However, the daily SPIs from day 8 onwards are depicting a deterioration that might indicate a downtrend is in the offing. Therefore, we would call for a SELL on this stock for the next 10-14 days, as the probability is more than 50%. If the probability is less than 50%, we will rate this as a WAIT or HOLD call. This analysis is the same for STOCK B.
Scenario 5
Facts:
14-day SPI = 4
Probability > 50% (Probability is the likelihood of an event happening)
ANALYSIS: SELL SIGNAL
In scenario 5, STOCK A has a 14-day SPI index of 4 that indicates a bullish trend and the daily SPIs are showing an upward trend. However, the last 7 daily SPIs are showing stagnation that might indicate the upward trend is unsustainable. A stagnation occurs when the daily SPIs for the last 7 days move in a tight range, that is, a 10-unit band. Therefore, we would rate this as SELL for the next 10-14 days, as the probability is more than 50%. If the probability is less than 50%, we will rate this as BUY. This analysis is the same for STOCK B.
Scenario 6
Facts:
14-day SPI = -4
Probability > 50% (Probability is the likelihood of an event happening)
ANALYSIS: BUY SIGNAL
In scenario 6, STOCK A has a 14-day SPI index of -4 that indicates a bearish trend and the daily SPIs are showing a downward trend. However, the last 7 daily SPIs are showing stagnation that might indicate the downward trend is coming to an end. A stagnation occurs when the daily SPIs for the last 7 days move in a tight range, that is, 10-unit band. Therefore, we would rate this as BUY for the next 10-14 days, as the probability is more than 50%. If the probability is less than 50%, we will rate this as SELL. This analysis is the same for STOCK B.
Scenario 7
Facts:
14-day SPI = 6
Probability > 50% (Probability is the likelihood of an event happening)
ANALYSIS: BUY SIGNAL
In scenario 7, STOCK A has a 14-day SPI index of 6 that indicates a bullish trend and the daily SPIs are showing an upward trend. Furthermore, the last 7 daily SPIs are showing an upward trend might be in the offing. Therefore, we would call for a BUY on this stock for the next 10-14 days, as the probability is more than 50%. If the probability is less than 50%, we will rate this as SELL. This analysis is the same for STOCK B.
Scenario 8
Facts:
14-day SPI = -5
Probability > 50% (Probability is the likelihood of an event happening)
ANALYSIS: BUY SIGNAL
In scenario 8, STOCK A has a 14-day SPI index of -5 that indicates a bearish trend and the daily SPIs are showing a downward trend. Furthermore, the daily SPIs from day 8 onwards are showing deterioration that might indicate a downtrend is in the offing. Therefore, we would call for a SELL on this for the next 10-14 days, as the probability is more than 50%. If the probability is less than 50%, we will rate this as BUY. This analysis is the same for STOCK B.
Scenario 9
Facts:
14-day SPI = 1
Probability > 50% (Probability is the likelihood of an event happening)
ANALYSIS: WAIT OR HOLD SIGNAL
In scenario 9, STOCK A has a 14-day SPI index of 1 that indicates a neutral stance and the daily SPIs are giving a mixed signal. Therefore, we would call for a WAIT or HOLD on this for the next 10-14 days until further trend is being established, as the probability is more than 50%. If the probability is less than 50%, it is also best to avoid STOCK A until it depicts a discernible trend. This analysis is the same for STOCK B.
Scenario 10
Facts:
14-day SPI = 10
Probability > 50% (Probability is the likelihood of an event happening)
ANALYSIS: BUY SIGNAL
In scenario 10, STOCK A has a 14-day SPI index of 10 that indicates an extremely bullish trend and the daily SPIs are showing an upward trend. Furthermore, the last 7 daily SPIs are showing a continuation of an upward trend. Therefore, we would call for a BUY on this for the next 10-14 days, as the probability is more than 50%. If the probability is less than 50%, we will rate this as SELL.
ANALYSIS: SELL SIGNAL
In scenario 10, STOCK B has a 14-day SPI index of 10 that indicates an extremely bullish trend and the daily SPIs are showing an upward trend. However, the last 7 daily SPIs are showing a deterioration that might indicate the upward trend is unsustainable. Therefore, we would call for a SELL on this for the next 10-14 days, as the probability is more than 50%. If the probability is less than 50%, we will rate this as BUY.
Scenario 11
Facts:
14-day SPI = -10
Probability > 50% (Probability is the likelihood of an event happening)
ANALYSIS: SELL SIGNAL
In scenario 11, STOCK A has a 14-day SPI index of -10 that indicates an extremely bearish trend and the daily SPIs are showing a downtrend. Furthermore, the last 7 daily SPIs are showing a continuation of the downtrend. Therefore, we would call a SELL on this for the next 10-14 days, as the probability is more than 50%. If the probability is less than 50%, we will rate this as BUY.
ANALYSIS: BUY SIGNAL
In scenario 11, STOCK B has a 14-day SPI index of -10 that indicates an extremely bearish trend and the daily SPIs are showing a downtrend. However, the last 7 daily SPIs are showing an upward trend. Therefore, we would call a BUY on this for the next 10-14 days, as the probability is more than 50%. If the probability is less than 50%, we will rate this as SELL.
Scenario 12
Facts:
14-day SPI = 3 (STOCK A)
14-day SPI = -3 (STOCK B)
Probability > 50% (Probability is the likelihood of an event happening)
ANALYSIS: WAIT OR HOLD SIGNAL
In scenario 12, STOCK A has a 14-day SPI index of 3 that indicates a bullish trend and the daily SPIs are showing an upward trend. Furthermore, the last 7 daily SPIs are showing an upward trend but there is a significant change in the day 14 daily index that might indicate a change in trend development, that is, a new trend is in the offing. Therefore, we would call a WAIT or HOLD on this to observe this counter for the next 3 days (4 bars rule) to determine the trend. If the next 3 days (up everyday) indicate an upward trend, then we will call it a BUY. Conversely, if the next 3 days (down everyday) indicate a downward trend, we will call it a SELL. When there is a significant change in the daily index, it is best to ignore the past SPIs before day 14, that is, day 13 and prior.
ANALYSIS: WAIT OR HOLD SIGNAL
In scenario 12, STOCK B has a 14-day SPI index of -3 that indicates a bearish trend and the daily SPIs are showing a continuation of a downward trend. Furthermore, the last 7 daily SPIs are showing a downward trend too but there is a significant change in the 14-day daily index that might indicate a change in trend development, that is, a new trend is in the offing. Therefore, we would call a WAIT or HOLD on this to observe this counter for the next 3 days (4 bars rule) to determine the trend. If the next 3 days (up every day) indicate an upward trend, then we will call it a BUY. Conversely, if the next 3 days (down every day) indicate a downward trend, we will call it a SELL. When there is a significant change in the daily index, it is best to ignore the past SPIs before day 14, that is, day 13 and prior.
SPI Analysis On Singapore Shares (Back-end Testings)
Listed below are 4 SPI analyses on 4 Singapore counters in November 2003.
| Stock Details | Buy | Sell | Profile/Loss |
|---|---|---|---|
| 50,000 shares each | 04/11/03 | 10/11/03 | 10/11/03 |
| CAM | $0.125 | $0.09 | -$1750 |
| CH Offshore | $0.385 | $0.35 | -$1750 |
| IPCO | $0.135 | $0.125 | -$500 |
| FoodEmpire | $0.39 | $0.36 | -$1200 |
CAM - SPI (04/11/03)
Facts:
14-day SPI = -2
Probability > 50% (Probability is the likelihood of an event happening)
ANALYSIS: SELL SIGNAL
CAM has a 14-day SPI index of -2 that indicates a bearish trend and the daily SPIs are showing a downtrend. Although the daily SPIs started to climb upward from day 11, it did not satisfy the 4 bars rule (up, up, up). Therefore, we would still call a SELL on this for the next 10-14 days, as this shows that there would be a continuation of deterioration in the downward trend and the probability is more than 50%. By refraining to buy this stock on 04/11/03, we would have avoided a $1750 loss by using SPI.
CH Offshore - SPI (04/11/03)
Facts:
14-day SPI = -2
Probability > 50% (Probability is the likelihood of an event happening)
ANALYSIS: WAIT OR HOLD SIGNAL
CH Offshore has a 14-day SPI index of -2 that indicates a bearish trend and the daily SPIs are showing a downward trend especially from day 4 to day 10. However, there is a significant change in the daily SPI on day 8 which might indicate a change in the trend development, that is, a new trend is in the offing. Furthermore, the last 7 daily SPIs are showing a mixed signal and are trading in a 10-unit band that indicates stagnation even though the last 4 daily SPIs satisfy the 4 bars rule. Therefore, we would call a WAIT or HOLD on this to observe this counter until it breaks the 10-unit band to determine the trend as the probability is more than 50%. By refraining to buy this stock on 04/11/03, we would have avoided a $1750 loss by using SPI.
Note: If you cannot interpret SPI, always follow the golden rule, that is, it is better to miss a 10% rise than to catch a 10% fall.
IPCO - SPI (04/11/03)
Facts:
14-day SPI = 3
Probability > 50% (Probability is the likelihood of an event happening)
ANALYSIS: WAIT OR HOLD SIGNAL
IPCO has a 14-day SPI index of 3 that indicates a bullish trend but the daily SPIs are showing a mixed trend. Furthermore, there is a sudden change in the daily SPI on day 10 that might indicate a new trend is in the offing but the daily SPIs from day 11 to 14 do not meet the 4 bars rule (down, down, down) and the probability is less than 50%. Therefore, we would call a WAIT or HOLD on this to observe this counter further to determine the trend. By refraining to buy this stock on 04/11/03, we would have avoided a $500 loss by using SPI.
Note: If you cannot interpret the SPI, always follow the golden rule, that is, it is better to miss a 10% rise than to catch a 10% fall.
FoodEmpire - SPI (04/11/03)
Facts:
14-day SPI = -3
Probability > 50% (Probability is the likelihood of an event happening)
ANALYSIS: SELL SIGNAL
FoodEmpire has a 14-day SPI index of -3 that indicates a bearish trend and the daily SPIs are showing a downtrend. Although the last 7 daily SPIs started to show an improvement, they did not satisfy the 4 bars rule (up, up, up). Therefore, we would still call a SELL on this for the next 10-14 days, as this showed that there would be a continuation of deterioration in the downward trend and the probability is more than 50%. By refraining to buy this stock on 04/11/03, we would have avoided a $1200 loss by using SPI.
PS: The above SPI scenarios are stated with the assumption that any potential investor has no stock holding. If the investor has a vested interest, he/she should only buy or hold onto the stock when SPI is bullish and sell when SPI is neutral or bearish.
Frequently Asked Questions
-
What do the 100-day overbought and oversold values mean?
The values mean that most of the investors bought the stock within these values for the past 100 days but the values are not the highest and the lowest prices for the stock. Statistically, these values are called standard deviations. You can use these levels to determine how much risk you want to take.
-
Why is there a sudden magnitude change in the 14-day index?
This is one of the peculiarities of SPI which can be skewed by the daily SPIs especially when the daily SPIs change dramatically. The 14-day SPI is just a general indicator of a trend, just like a linear or regression equation.
-
Is it necessary for me to use the recent 7 days to determine a stock trend?
As SPI cardinal objective is to reduce investment risks, we have designed SPI to be on the conservative side. However, you can use the recent 4 days SPIs (4 bars rule) instead of 7 days as the risk is not significantly higher.
-
Is SPI suitable for day traders?
SPI is not suitable for day traders. It is more suitable for traders with a weekly perspective as it is a momentum indicator. In a nutshell, SPI is more suitable for swing traders or position traders.
-
Would it be too risky to enter or buy a stock when it is overbought (above overbought value) and when the SPI is extremely bullish?
As SPI is used for predicting the trend for the next 10-14 days, it is still too early to judge that a stock cannot have an extended rally unless the daily SPIs for the recent 4 working days are depicting a change in the development of this trend. It usually takes 4 days to see a trend being developed. If that happened, it would mean that one had entered at the end stream of the bullish trend and it would be best to cut loss and channel your fund into another stock to recoup your loss.
However, there are some safeguards to minimize the possibility of entering into the end stream of a bullish trend but these safeguards are not 100% accurate or reliable. One can look at the previous SPIs and compare them with the stock prices. If the stock has already moved up in comparison with SPI, it could mean that one is entering at the end stream of a bullish trend. Conversely, the stock can have an extended rally and continue to rise. Another indicator to watch out for would be the overbought value. If the current price is above the overbought value, one may be entering at the end stream but the stock can be having an extended rally.
Stock investment is a high risk activity and what SPI can do is to help to reduce your investment risk.
-
Does the 14-day SPI have to be at least 2 before I can buy a stock?
No, the 14-day SPI does not have to be at least 2 except when the stock is in a stagnation state.
-
Do I need to wait for the probability to be above 50% before I can buy? Do I need to look at the previous probability as well?
As stated, it is more risky to buy when the probability is less than 50% as there are 3 outcomes, which are, up (33.3%), unchanged (33.3%) and down (33.3%). However, if you are a risk taker, you can do contrarian trading when the probability is less than 50% but this carries a higher risk.
You have to be careful when the previous probability is less than 50% and the current probability is more than 50% or vice versa as SPI is adjusting to the stock market reactions. You also need to watch out if there is a significant change in the probability, for example, from 30% to 50%, as you may not need to do contrarian trading when such circumstance arises due to SPI adjusting itself to the dynamic stock market conditions.
-
What constitutes a significant change in the daily SPI?
Generally speaking, a significant change in the daily SPI is usually more than a 100-unit band or a 100% change when compared to the previous SPI. As there are paradoxes in every theory and also in our postulations for SPI, it can be confusing when it comes to determining a 100% change. For example, a drop from 1 to 0 is not a significant change even though there is a 100% change in the figure.
Therefore, the general rule of thumb is any movement within a 10-unit band is not considered a significant change in the daily index.