Investors hot for the 'system': Small players are turning to computer programs for stock help
National Post
Saturday, May 20, 2000
Financial Post Investing: Money
Thomas Hirschmann

The major market trend of the past year, which has helped fuel the bull market, has been investors striking out on their own and making their own investment decisions. But retail investors have found it difficult to sift though the mountain of information at their disposal.

Enter "the system."

Professional investors have known the benefits of systems for ages; many mutual fund managers use quantitative mathematical analysis to sort through the muck and guide them to the best stocks. Now, new proprietary systems are popping up for the average investor, giving them their very own stock-picking gizmos.

Take Cynthia Curtis, who came third in the recent National Post Stock Challenge. She posted a 65% return on her initial portfolio of 100,000 play dollars during the three-month contest.

Not to take anything away from Ms. Curtis' stellar performance, but she was using a system to beat the system. When she saw the ad for the Stock Challenge in November, she called a friend, Bob Bilyea, to give her a hand picking some stocks. It just so happened that Mr. Bilyea was putting the finishing touches to a system he plans to sell to the public and it was ready for a test run.

Let's take a step back for a second. Systems like Mr. Bilyea's are based on technical analysis. Technical analysis bypasses fundamentals and focuses solely on number patterns. So rather than buying and selling stock based on fundamental information, you buy and sell stock based on changes in price patterns, volumes, trading patterns and whatnot. Institutions pay quantitative analysts big bucks to create and interpret stock-tracking programs.

Mr. Bilyea says the system he has devised is based on price patterns. He says it identifies the pattern of accumulation and distribution of various stocks, which leave "clues" as to when a move is impending. "Once you know what to look for on a price chart, it become very evident and, I hesitate to say it, almost easy to profit from."

Ms. Curtis put the system to the test when she picked companies for the Stock Challenge. She used the price-pattern system, in conjunction with the realization that the tech sector was hot. So she loaded up on tech stocks, and off she went. Three months later, she finished third in the contest.

Mr. Bilyea isn't the only one who thinks he has a winning gizmo for the average investor.

Christopher Thomas, president and chief executive of Measuredmarkets Inc., is set to release his own tool to spot statistically deviant stock trading behaviour. The name M2 Early Warning Service makes it sound like a remnant of the Cold War, but Mr. Thomas says it's actually all about examining individual trades.

He set algorithms to track price, volume and trading numbers over a period of time to determine normal trading patterns. The system tracks the stocks, and sets off an alarm when there is a significant change in market or trading behaviour. In essence, it is an alarm system that lets investors know when a stock is exhibiting unusual behaviour.

The key is to remember that these systems are tools -- not plug-and-play games where you simply turn them on and off. Moreover, just because something is mathematical does not means it is infallible. These systems are not money in the bank.

One technical analyst's system was telling him that the tech market would crash. However, it was giving him those signals back in November, just one month into the five-month tech run. Even with the recent correction, the Nasdaq composite index is still up about 5.3% since mid-November.

Financial Post
Black & White Photo: Glenn Lowson, National Post / Cynthia
Curtis used Bob Bilyea's proprietary stock-picking systems to help
her in a recent stock contest.

Copyright© Bob Bilyea 2006