Weekly Chart Review

Z-Score

A couple of weeks ago, we examined the Asset Class Review section of this newsletter. Specifically, we focused on the “Overall Totals” and “Trend” sections of the report. You can review that piece by going here.

This week, we will take a deeper dive into the “Z-Score (1Yr)” section.

First, let’s start by defining Z-Score and we’ll use Investopedia.com’s definition:

“Z-score is a statistical measurement that describes a value's relationship to the mean of a group of values. Z-score is measured in terms of standard deviations from the mean.”

“If a Z-score is 0, it indicates that the data point's score is identical to the mean score. A Z-score of 1.0 would indicate a value that is one standard deviation from the mean. Z-scores may be positive or negative, with a positive value indicating the score is above the mean and a negative score indicating it is below the mean.”

For those that are visually inclined, here is the typical “bell curve”. Note how the Z-Score values line up with the Standard Deviation values.

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As it pertains to the Asset Class Review section of this report, we use the price data over the trailing 1-year (hence the “(1Yr)”) to get a sense of where today’s price is in relation to the previous year.

Additionally, the Z-Score allows for comparability across multiple asset classes.

Overbought

Using the screen grab below, let’s focus on XLY and its current Z-Score of +3.13. This means that as of Friday’s close, XLY’s price is 3.13 standard deviations above its mean price of the previous year.

Cross-reference a value of +3.13 with the “bell curve” image above and you’ll notice that XLY’s current price is very far in the “right tail” of potential outcomes.