Building a Basket

The first step in building a basket is to select the stocks that will

come close to duplicating the index. This is made simpler because

you are placing the top three stocks in each of your 10 sectors. In

most cases, this will approximate the stocks that are part of program

arbitrage. It should become obvious that it is possible for you

to do some arbitrage of your own by going long in one sector and

shorting in another. In most cases, you are looking for the top three

stocks out of all of the stocks in the basket. Once momentum is

found, you trade that momentum until it ends.

Part of building a basket is to input into your computer the various

indices that coincide to the sector you are building—for example,

the Semiconductor Index known by the symbol SOX. If you are trading

Intel or Micron Technology, you need to know not only what the

market is doing but the Semiconductor Index as well. This is true for

all stocks. An excellent example of the importance of knowing how

the index is trading is Internet stocks. The S&P 500 and the Nasdaq

might be in a strong downtrend for the day while Internet stocks are

trending up. An examination of the Internet index symbol INX would

confirm this trend, which is counter to the market. Indices can be

charted to give you a visual image of the index trend. Using moving

averages, RSI, and other indicators, you can establish the strength of

that trend on a given day or over a specific period of time.

Here is an example of five baskets, each divided into a specific

sector. Another set of five sectors will complete the total basket of

30 stocks. Identified by their symbols from left to right, the sectors

are Computer Hardware, Semiconductors, Food, Telecommunications,

and Pharmaceutical.

I suggest that you build your baskets out of the top stocks in

the various indices. One stock that you will want to include is General

Electric (symbol GE). If you print out a chart of GE and superimpose

the S&P 500 over it you will see that GE and the S&P 500 are

almost congruent. When the programs are selling GE, it goes down.

When they buy GE, it usually goes up. Here is a small list of stocks,

identified by their stock symbol, that will more than likely be found

in buy and sell programs.

The first step in building a basket is to select the stocks that will

come close to duplicating the index. This is made simpler because

you are placing the top three stocks in each of your 10 sectors. In

most cases, this will approximate the stocks that are part of program

arbitrage. It should become obvious that it is possible for you

to do some arbitrage of your own by going long in one sector and

shorting in another. In most cases, you are looking for the top three

stocks out of all of the stocks in the basket. Once momentum is

found, you trade that momentum until it ends.

Part of building a basket is to input into your computer the various

indices that coincide to the sector you are building—for example,

the Semiconductor Index known by the symbol SOX. If you are trading

Intel or Micron Technology, you need to know not only what the

market is doing but the Semiconductor Index as well. This is true for

all stocks. An excellent example of the importance of knowing how

the index is trading is Internet stocks. The S&P 500 and the Nasdaq

might be in a strong downtrend for the day while Internet stocks are

trending up. An examination of the Internet index symbol INX would

confirm this trend, which is counter to the market. Indices can be

charted to give you a visual image of the index trend. Using moving

averages, RSI, and other indicators, you can establish the strength of

that trend on a given day or over a specific period of time.

Here is an example of five baskets, each divided into a specific

sector. Another set of five sectors will complete the total basket of

30 stocks. Identified by their symbols from left to right, the sectors

are Computer Hardware, Semiconductors, Food, Telecommunications,

and Pharmaceutical.

I suggest that you build your baskets out of the top stocks in

the various indices. One stock that you will want to include is General

Electric (symbol GE). If you print out a chart of GE and superimpose

the S&P 500 over it you will see that GE and the S&P 500 are

almost congruent. When the programs are selling GE, it goes down.

When they buy GE, it usually goes up. Here is a small list of stocks,

identified by their stock symbol, that will more than likely be found

in buy and sell programs.