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Note: If you'd like to contact me regarding the CAPS1StarIndex performance, please do so via my acutal username: gameguru. You can also check out how my non-Index picks are performing and taunt me about them. You'll find a link in the Favorites section for CAPS1StarIndex.


For those interested, as I have been, in whether the CAPS system will prove to be predictive, I set up two model portfolios - CAPS Indices, if you will - to try to test this. One is CAPS1StarIndex; its twin is CAPS5StarIndex.


CAPS1StarIndex Methodology:


CAPS1StarIndex takes 200 stocks from the universe of 1-Star CAPS-rated stocks. Stocks must be >$100M in market cap. (and also >$1.50 in price)- that is, the index must be able to rate them. All eligible 1-Star stocks are then sorted by number of picks, and a sliding scale cut-off is applied to get to ~200 stocks. Any ties in the lowest # of picks bracket are broken by the % of Underperform calls (Bears). If there is still a tie, I intend to use % Bears among All-Stars, then Market Cap. We end up with exactly 200 stocks, which are all rated to Underperform with an Unspecified time frame. Stocks will remain rated for 1 month, at which time we'll do it all again and rebalance the ratings "portfolio" by ending any that are no longer in the 200 and adding new entrants.


Judging the CAPS1StarIndex Performance:


So how should we judge whether the CAPS1StarIndex is performing? Theoretically, I don't particularly care (and neither should anyone else) where CAPS1StarIndex is in the player rankings. We don't want to know if it beats the other players in CAPS (theoretically, all players in the CAPS game could have a negative score and the one with the least horrid performance would be at the top). What does matter, and how I intend to measure the success of the Index, (and perhaps CAPS as a stock-rating system), is if the calls simply outperform the market (that is, if the underperform calls in CAPS1StarIndex underperform the market). This should be reflected if the Index has a positive score - how big that positive score actually is will tell us by how much the Index outperforms the market. We might also want to look at accuracy, to gauge how consistently the 1Star stocks underperform versus how much of the performance might be driven by a few big losers.


I'd also like to give a nod to the other attempts at CAPS indices out there. CAPS5star1star, for instance, includes 150 5-Star and 50 1-Star stocks. I set up these to more "purely" track the supposed top and bottom stocks in the CAPS universe. I'd like to encourage others to add additional indices (some obvious niches would be for 2-, 3-, and 4-Star stocks) and let us know about them.


I hope you enjoy the ride!


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