Much of my recent research posted here and on the Trading Markets site has dealt with lead-lag relationships in the market: identifying sectors that lead the major market indexes. One of my earliest investigations in this area was in an article I called "The SOX and the Stocks", in which I found that semiconductor stocks led the S&P 500 index.
I noticed today that, on a five-day basis, the S&P (SPY) is up by more than 1.6% but the semiconductor issues (SMH) is down by 1.35% over that same period. I decided to update my study by seeing what happens when these averages travel in different directions.
Since March, 2003 (N = 740), we have had 243 days in which SPY has been up more than 1% on a five-day basis. Five days later, SPY has averaged a gain of .17% (139 up, 104 down), considerably worse than the average gain of .30% (431 up, 309 down) for the sample overall.
When SPY has been up by more than 1% and SMH has been down more than 1% (N = 18), the next five days in SPY have averaged a loss of -.20% (9 up, 9 down). When SMH has been up more than 1% while SPY has also been up, the next have days in SPY have averaged a gain of .25% (109 up, 74 down).
It thus appears that strength in SPY is less likely to continue if it is not matched by strength in SMH--a factor we have to count as mildly bearish going forward.
Interestingly, I have found this relationship to hold on an intraday basis as well: It was the failure of SMH to break its previous day's highs early today that first alerted me to the possibility of a selloff.