Wednesday, March 22, 2006

Coming Market Research

Just wanted to outline a direction my research will be taking, integrating the theme from the last post (looking at multiple time frames) and the recent theme of market trending. I'll be working on creating trending measures of the markets on two different time frames and then will see if combining short- and longer-term trend measures helps us identify historical patterns. If so, that would be significant, because the trend measures will be ones that could be applied to any stocks or markets.

A second direction is identifying sectors that commonly lead the broad market and comparing their trend measures with that of the broad market. My hypothesis is that a "crossover", in which the trend of the leading market overtakes the broad market trend, might provide an entry signal for short-term trend followers.

Thanks again to readers who continue to provide lots of good food for thought. I hope this blog returns those favors--



John Wheatcroft said...

In regard to your question - yes sir - every day I go away with a new perspective and a dozen new ideas at least. But here is one I worked on several years ago that might fit into your current quest.

I normalized the prices of the spyders (xlf, xli etc) against themselves. Then normalized spx. I then averaged the results and overlayed the normalized spyders over spx and over each other. This showed that sometimes this spyder led - sometimes that one. I was only able to get to a generality without singularity. For example as might be imagined the new bull market (Mar 03) was led and supported by financials (xlf) and then picked up by energy (xle) for the past 16 months or so.

If you look at this I suggest you use weekly data points because dailies can get cumbersome.

I started this investigation/ analysis to see if I could better time RYDEX fund purchases. Their inverted products seem to make sense.

Brett Steenbarger, Ph.D. said...

Very interesting idea, John! At some point I probably will pick up analyses of weekly data for longer-term traders. The historical patterns with weekly data bring into play other relationships as well, such as interest rates and lead/lags of the indices of various countries. Thanks for passing along your findings.