Back to Basics With Quantitative Analysis
by Anthony J. Macek
Ever notice how we seem to want to do things the hard way? Anthony Macek, publisher of the "Just the
Facts" newsletter, has, and he's proposed a solution to simplify our lives using quantitative analysis.
Here, Macek uses a technique of combining momentum and trend data to rate the condition of the
market. Take a look.
Developing an infatuation with complex formulas and intricate analyses can cause us to lose sight of
what we are striving to attain. If we are not careful, we can find ourselves afflicted with paralysis by
overanalysis. Many persuasive arguments exist for examining our world in a less complex fashion. In
doing so, the larger picture becomes clearer, and phenomena previously overlooked, such as trend and
momentum, become more evident.
Simply stated, trend is defined as the tendency of a phenomenon to continue in its current path or
direction. In essence, it measures the internal dynamics of a particular area under study. Momentum, a
measure of price change over a series of prices, is directly related to the trend in that it relies on the same
criteria. Because momentum is an indicator that gauges the strength of the trend, however, it is slower to
react to new data and is therefore considered to be a longer-term indicator.
Examining trend and momentum can be simple or complex. In my experience, after years of number
crunching using various computer models, employing countless variations of exponential and other
weighted moving averages, using measures of relative strength, oscillators, stochastics, and so forth, I
discovered that there was no great statistical advantage to using more complex means of measuring
various phenomena. That is not to say that the use of more complex methods of analysis does not produce
superior results; but the slight statistical advantage gained using more complicated methods would have
to be evaluated in relation to the time spent in the process. Choosing a less elaborate method may not
only be more time effective, but it may also be more than adequate to achieve the ultimate goal: more
timely and better-informed investment decisions.