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Date of Award

Summer 1968

Rights

Access perpetually restricted to EWU users with an active EWU NetID

Document Type

Thesis: EWU Only

Degree Name

Master of Science (MS) in Business Administration

Department

Business and Marketing Education

Abstract

"The ISEC System of Stock Analysis was developed in 1965 by Mr. Fredrik J. Ranney of Patterson, New Jersey. The System has two main components: (1) a small analog computer which is sold or leased to subscribers of the ISEC Investment Advisory Service, and (2) data input sheets distributed to subscribers on a weekly basis. The individual investor combines these two elements to aid him in the selection, management, and sale of the more than two thousand stocks for which input data is published. The input values for a particular stock are used to program the ISEC 250 Computer. When properly programmed, the computer will indicate a numerical quantity which is a relative indication of a stock's potential for future gains. It is also possible for the subscriber to determine whether a stock is a "buy," a "sell," or a "hold" at any moment in time. In addition, the ISEC System attempts to forecast changes in market trend and, also, it attempts to predict stock prices for periods ninety-days in length. Several other operating techniques and capabilities of the ISEC System of Stock Analysis are fully discussed in the thesis. An experimental investigation of certain operating techniques of the ISEC System was conducted. The purpose of the study was: (1) to analyze and examine the ability of the ISEC System, as modified by the experimenter, to predict stock prices for future periods ninety-days in length; (2) to chart and analyze the relationship between market trend predictions made according to the model and actual market fluctuations; and (3) to determine the feasibility of earning a higher rate of return by violating certain rules of the ISEC System. Three different methodologies were used in order to investigate the problem areas mentioned above. First, the investigation of ninety-day price prediction concerned an analysis of predictions and actual price movements for 111 randomly selected stocks. These stocks were chosen from the New York and American Stock Exchanges. Second, the research related to market trend prediction involved a comparative analysis of market trend forecasts made according to the ISEC System and actual market fluctuations. Market conditions were based upon the movement of the Dow Jones Industrial Average. Third, six model portfolios were selected and managed throughout a ninety-day period. Three of these portfolios were purchased and managed on the basis of an empirical experimental design. Certain rules of the ISEC System were violated at will in the management of these portfolios. An analysis of comparative and aggregate performance was then conducted. The following hypothesis was accepted on the basis of evidence obtained during the study and during previous research periods. The ISEC System serves to forecast upward and downward trends in the market based upon the movement of the Dow Jones Industrial Average. Although the System correctly forecasted only forty percent of the directional changes during this study, the magnitude of error associated with incorrect forecasts was quite small. Over a two year period the ISEC System market trend indicator correctly forecasted about fifty-six percent of the market trend directional changes. Approximately eighty-seven percent of the total point changes in the Dow Jones Industrial Average are associated with the correct market trend forecasts. Thus, it appears that the technique used by the ISEC System is a relatively good market trend indicator. The following hypothesis was rejected on the basis of evidence obtained during the study. By altering the model's technique used for ninety-day price projections it is possible to increase the accuracy of these predictions to a level of eighty correct price projections out of one hundred attempts. Past results obtained by investment researchers using the ISEC model indicated a degree of accuracy of about seventy-six correct projections out of one hundred trial observations. In this study the level of accuracy achieved using the ISEC System was approximately thirty-one percent. The experimental model developed by the researcher achieved an accuracy level of about thirty-nine percent. Several factors which may have influenced the results are mentioned in the thesis. On the basis of these findings, however, the hypothesis was rejected. There was insufficient evidence available upon which to either accept or reject the following hypothesis. One may earn a rate of return in excess of that earned by strict adherence to the rules of the ISEC System. Reference is made to the fact that the System dictates a buying situation only when the market trend, as signalled by the ISEC method, is upward. System rules were purposely violated and then the profitability of investment during market downtrends was investigated. The small number of reinvestment opportunities and the limited number of market days for which new stocks were held did not provide sufficient evidence upon which to make a valid judgment. Although evidence obtained tended to indicate that the hypothesis may be true, extensive research would be necessary to fully test this hypothesis.

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