Weak Russell 2000 Index and the NYSE TICK

Tuesday saw a downside breakout and a loss of over 1.5% in the Russell 2000 stock average (IWM). I decided to look at what happens after large Russell declines of over 1.5% as a function of broad selling in the market. This selling, readers of my Trading Psychology Weblog know, is measured by the Adjusted TICK: the NYSE TICK adjusted for a zero mean.

Since July, 2003 (N = 653), we've had 64 days in which IWM has been down 1.5% or more. The next day, IWM has averaged a loss of -.03% (32 up, 32 down), which is weaker than the average daily gain of .08% (353 up, 300 down) for the sample overall.

When we divide the sample in half based on the Adjusted TICK, however, a pattern emerges. When the TICK is weak (N = 32), the next day in IWM averages a loss of -.22% (14 up, 18 down). When the TICK is strong (N = 32), the next day in IWM averages a gain of .16% (18 up, 14 down). Tuesday saw a TICK reading in the strong end of the sample, suggesting lesser odds of carryover selling on Wednesday.

Interestingly, when we look three days out after a weak day in IWM, expectations have been favorable. The market has averaged a three-day gain of .51% (39 up, 25 down), better than the average gain of .22% (384 up, 269 down) for the sample overall. In general, buying weakness after a weak day in IWM has been a solid strategy during the bull market.