Warning sign for stock markets: Leptokurtic distribution
We report kurtosis in our Chicago Quantum Net Score analysis for clients on a daily basis. We analyze the daily stock price changes and we compare then to various normal distribution. We look at kurtosis, or the fourth movement of stock prices, and skewness, which is the third movement.
You can think of those statistics as derivatives of stock price changes:
Today, a stock that we reported to be very highly leptokurtic fell around one quarter in value, or around 25%. Over the day, it was still down 21% when we checked. Here is the quote below (source: Yahoo Finance).
This was so interesting that we made a video: Leptokurtic Stocks, Early Warning that came true for one the stock $TGNA of one company Tegna Inc. Here is the video below.
What is a leptokurtic stock? A stock with a leptokurtic stock distribution is one where the probability of the next random sampling (e.g., tomorrow’s price change) being a high standard deviation move or outlier is greater than for a stock with a normal distribution. It is like a bell shape curve that is raised off the x-axis, or has more ‘room in the tails.’
For us, we use this as a means to invest in either stock options or to look at stocks to hold in an optimized long portfolio. To that end, we couple our analysis of kurtosis with low variance stocks. These stocks really stand out as seeming low risk, but with a chance to leap. They are unique and fairly rare. There are currently seven of these stocks:
Ticker, Kurtosis Score (standard), variance (normalized)
ATVI, 5.91, 0.0001110
GIS, 5.21, 0.0002181
HRL, 10.91, 0.0001821
HSY, 5.30, 0.0001910
K, 6.93, 0.0001952
PINC, 6.49, 0.0002068
SJM, 13.32, 0.0002199
We suggest to our clients that they should keep track of stocks with a high kurtosis score for a sense of the safety of the stock. A leptokurtic stock with a low variance normally should not move…