Why is it Important?
To help you understand the true performance of Market Power Indicator (MPI), I have to introduce you to a common professional investment term called alpha. The reason why alpha is so important is that we need to separate the return generated by the general stock market movement from that which is specific to the your own stock’s return. In other words, we are answering the question: would we have been better off just buying one of the broad market index funds (thus your returns would mirror that of the overall market) versus buying that particular stock. We will use the S&P 500 market index as a barometer for market return.
Let me give a couple of examples to better illustrate. If the stock market has risen 10% in the past year and a stock that was recommended as a buy has not gone up at all, then the stock selection has underperformed the market by that 10%; in this case, the alpha would be negative 10%. Now if that same stock in question had gone up by 20% and the market had gone up 10% then we would have positive alpha of 10%.
Let’s try another example, slightly more complex. Assume we had recommended that you sell a certain stock. Now let’s say that the market has fallen 10% in the past year. If we had recommended that you sell a particular stock and it had not gone down at all, then we would have a negative alpha of 10%. But if that same stock would have gone down by 20% then we would have still outperformed the overall market by that excess return, resulting in a 10% positive alpha. Notice how the alpha can be positive, even if you still lost value.
What the MPI performance calculation does is attempt to measure either positive or negative alpha for each recommendation given. (It is possible for alpha to be zero if the market return is exactly the same as the actual buy or sell recommendation.) When you look at the bottom of the quick stock lookup box, you will see a bar that shows the MPI performance.
MPI performance is generated by taking a stock’s return from the date of the most recent signal (recommendation) change, and then comparing its results with the S&P 500 index. Signals that have a green color classification signify outperformance versus the index which is positive alpha. Signals that have a red color classification signify underperformance versus the index which is negative alpha.
The reason why we are doing our computations like this is to show you how all of our recommendations have done since inception of MPI at the end of 2010. This is the most conservative way that I can show you how our recommendations have done with full transparency, allowing you to see how this program fits in with your own investment philosophy.
Remember no stock market tool is perfect, so that it is important to view both the strengths and shortcomings of any tool. It is my sincere hope that MPI is helpful for you in your stock market investing.
Kevin E. Stewart