Monday, October 26, 2009

Introducing: The Trend & Value 50 Index

the Trend & Value 50 Index is designed as a broad and even measure of the equities market. it's not price weighted like the Dow Averages, but neither is it weighted according to market capitalization like the S&P benchmarks. rather, each of the 50 components are weighted equally.

while the T&V 50 has a fraction of the components as the S&P 500, we believe that it will more accurately reflect health of the Corporate System as a whole. this assertion can best be supported by explaining the parameters chosen when originating the index.

your author's initial idea was to construct an index of the largest stock (by market cap) of each 'industry group', but it turns out there are like a couple hundred of these 'industry groups' but the finviz website (which I am using as my data source) only allows users to build portfolios with a maximum of 50 symbols. so until we get some computing support Trend & Value will stick to 50 symbols for our indexes.

the minimum requirements for inclusion in the index are as follows:

Positive P/E over past year

Dividend Yield greater than 1%

Share Price greater than $10

Average Daily Volume greater than 1 million shares (though a couple exceptions had to be made here)

of this universe of symbols we wanted to distribute the components as widely across the economy as possible. so it was determined the index could only include 6 stocks from each of the 8 major sectors. and since the index is equally weighted that means each sector only makes up 12% of the index.

further, each of the six stocks selected from a particular sector had to be of a different industry group.

so we took the 6 largest stocks in a sector, where none of those stocks repeated an industry group. so for example the 6 stocks selected from the Industrial Goods sector were ABB, CAT, EMR, HON, ITW, RTN. these made the list even though the 6 largest stocks in the sector are ABB, CAT, EMR, HON, LMT, GD. LMT and GD did not make the list because they are in the same industry group classification as HON.

using this filtering mechanism we arrive at an index comprised of the following 50 companies:

Ticker Sector Industry
BHP Basic Materials Industrial Metals & Minerals
MON Basic Materials Agricultural Chemicals
OXY Basic Materials Independent Oil & Gas
SLB Basic Materials Oil & Gas Equipment & Services
VALE Basic Materials Steel & Iron
XOM Basic Materials Major Integrated Oil & Gas
CL Consumer Goods Personal Products
PEP Consumer Goods Processed & Packaged Goods
PG Consumer Goods Personal Products
PM Consumer Goods Cigarettes
KFT Consumer Goods Food - Major Diversified
KO Consumer Goods Beverages - Soft Drinks
MS Financial Diversified Investments
MET Financial Life Insurance
AXP Financial Credit Services
BBV Financial Foreign Regional Banks
HBC Financial Foreign Money Center Banks
RY Financial Money Center Banks
TEVA Healthcare Drug Manufacturers - Other
HLF Healthcare Drug Related Products
BAX Healthcare Medical Instruments & Supplies
MDT Healthcare Medical Appliances & Equipment
JNJ Healthcare Drug Manufacturers - Major
PPDI Healthcare Medical Laboratories & Research
RTN Industrial Goods Aerospace/Defense - Major Diversified
ITW Industrial Goods Diversified Machinery
ABB Industrial Goods Industrial Electrical Equipment
CAT Industrial Goods Farm & Construction Machinery
HON Industrial Goods Aerospace/Defense Products & Services
EMR Industrial Goods Industrial Equipment & Components
HD Services Home Improvement Stores
CMCSA Services CATV Systems
DIS Services Entertainment - Diversified
MCD Services Restaurants
UPS Services Air Delivery & Freight Services
WMT Services Discount, Variety Stores
T Technology Telecom Services - Domestic
MSFT Technology Application Software
QCOM Technology Communication Equipment
CHL Technology Wireless Communications
IBM Technology Diversified Computer Systems
INTC Technology Semiconductor - Broad Line
ENI Utilities Foreign Utilities
EXC Utilities Diversified Utilities
SO Utilities Electric Utilities
SRE Utilities Gas Utilities
WTR Utilities Water Utilities
UTX Conglomerates Conglomerates
MMM Conglomerates Conglomerates
GE Conglomerates Conglomerates

there are only 5 stocks from the Utilities sector because there are only 5 different industry groups within that sector. the 3 'Conglomerates' on the list were included to make the index an even 50 stocks.

to our knowledge, the Trend & Value 50 Index is unique in its construction; we know of no other index that measures such a broad spectrum of the economy with an equal weight methodology. (the Value Line index may be an exception, but it includes a many small and mid cap companies.)

Component Changes and Reweightings

a stock will be removed from the index any time it drops below $10 in price, produces a negative P/E, or the annual dividend yield drops below 1%. in any of these events the next eligible stock within its sector will fill this position immediately.

if a stock is bought-out or merged or taken private it will also be replaced with the next eligible stock with its sector, but in this case not until the shares stop trading completely and are delisted.

the entire index will be reconstituted and reweighted once a year in late October with selection filters identical to those outlined above.

the Trend & Value 50 Index has a base value of 1000 calculated from closing prices on Friday 10/23/09. we will post the closing value for this and some of our other special indexes after the bell each trading day, so check back often. the first such update will follow shortly.