Newsletter
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In view of the unspeakable suffering that the terrorist attacks have brought to New York and Washington D.C., it is difficult to engage in sober analyses of current events in international markets. Nevertheless, since September 11, we have employed all of our resources in the observation and comprehensive analysis of the movements of the markets following this catastrophe.
No software system, of course, is able to predict an event such as the terrorist attacks in the US. But the often highly emotional reactions of investors following an event like this also constitute a complex problem for an analysis system such as NeuroStrategy.
On September 11, we advised our customers to suspend trading on the basis of NeuroStrategy models for the time being, until sufficient findings regarding the reaction of the system in such an extreme case were available. Merely 10 days later, we are now proud to announce that NeuroStrategy has already adapted to the changed conditions. Thus, the DAX portfolio, for example, was able to gain 6.5% since September 11 and thus ranks 23.4% above market.1 NeuroStrategy's acquired mechanisms of adaptation and risk management were persuasive even and especially under these extreme market conditions.
NeuroStrategy reacted to the sudden slump in the markets on September 11 and 12 with clear signals: in about 80% of the securities contained in the portfolios, the software issued definite short recommendations. While some positions within the portfolios experienced losses up to 26%, the portfolios themselves weathered the first days with an average loss between 2% and 5% and were thus clearly above market.1 Portfolios with securities from the insurance sector profited from moderate short positions, which they had assumed several days prior to the event. The unexpected slumps thus had a rather positive effect on the performance of the portfolios concerned.
These observations on non-American portfolios are also confirmed for the American markets of the last two days. Thus, for example, the US portfolio accessible for registered customers of NeuroStrategy Web Access with 40 securities from Dow Jones, NASDAQ100 and S&P500 lost altogether 4.8% and thus is 8.3% above market.1 The highest losses in this portfolio (HP with -26% and Boeing with -20%) contrast with gains in the area of 36% (AOL Time Warner), 11.5% (JP Morgan Chase & Co.), 7.2% (AT&T) down to 2.3% (Exxon Mobil).
While gains and losses in the first two to three days following such an event are largely due to chance (evaluation of the market or security prior to the catastrophe), in the medium term (within one to two weeks), NeuroStrategy should be able to adapt to the new situation and thus be able, for example, to take a completely altered risk level into consideration in its strategic recommendations.
Although an analysis of the medium-term behavior for the American markets is not yet available, we do have such an analysis for the non-American markets, markets which had to find their way last week, while Wall Street was shut down. The following chart shows without commentary, how NeuroStrategy handled the complex situation since September 10, 2001. By clicking on the portfolio symbol, you can view a detailed list according to securities.
| Portfolio | Returns | Performance | Sharpe Ratio |
| IVX:DAX | 6.94% | 25.57% | 2.43 |
| IVX:JAPAN | 1.03% | 11.78% | 1.40 |
| IVX:NEMAX | 3.86% | 18.91% | 0.58 |
| IVX:SMI | 3.00% | 20.93% | 0.35 |
Periods of heightened insecurity and volatility imply, in spite of the opportunities of such situations, also an increased risk. We are currently making every effort to equip our customers specifically for such market situations with additional tools that can counteract this increased risk.
With the Ivorix Confidence Ratio (ICR), all strategy models will soon issue a readily interpretable measure of the risk behavior of the model. The ICR is a number between 0 and 1 and reflects the reliability of the strategic recommendations of the recent past. The higher the ICR of a strategy model the lower the risk of the behavior of the model. The ICR can thus be used as an additional weighting factor for the strategic recommendations.
For the non-American markets, we now recommend a resumption of trading with NeuroStrategy. Since the uncertain political situation and the delayed reactions of the American markets once again make for an increased risk, we recommend moderate volumes in securities where the strategy models have proven their rapid adaptability over the last 10 days. Models for securities at American markets should still be kept under observation in the coming week, before they are put back into operation.
Updates for the NeuroStrategy Finance Workstation as well as for the NeuroStrategy Intranet Server that allow for the inclusion of the Ivorix Confidence Ratio in the trading strategies will be available shortly. The corresponding ICR values will also soon be published on the Ivorix NeuroStrategy Server.
Best regards,
Benjamin Stein/Jens-Christian Fischer
Managing Directors Ivorix GmbH
1 - The relative performance of a NeuroStrategy portfolio is calculated as the difference between the average return of the portfolio and the average performance of the assets contained in the portfolio. Within portfolios, the securities are not weighted. "Above market" should thus be read as: above the buy-hold performance of the securities contained in the portfolio.
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