Wednesday, March 08, 2006

More SOX and Stocks

Keep your eyes on the Trading Markets site this weekend. I have a historical analysis scheduled for publication that examines the stock market's trending behavior over a 40 year period. It's eye opening. I'll have a very brief summary on the Trading Psychology Weblog tonight.

I thought I would update some of the modeling with the semiconductor stocks (SMH), given that we're down more than 5% over the past four trading sessions. One wrinkle I'm adding to the analysis is that I'm examining outcomes across three instruments: SMH, QQQQ, and SPY. This addresses the theme I've been touching upon lately of maximizing the instrument that you trade as well as the timing of trades.

Since March, 2003 (N = 753), we have had 53 days in which SMH has been down more than 5% over a four-day period. Four days later, here's how the outcomes looked:

  • SPY: Average gain = .79% (38 up, 15 down). Average four-day gain for sample overall = .24% (435 up, 318 down).
  • QQQQ: Average gain = 1.21% (36 up, 17 down). Average four-day gain for sample overall = .31% (421 up, 332 down).
  • SMH: Average gain = 1.80% (35 up, 18 down). Average four-day gain for sample overall = .34 (400 up, 353 down).

What we can see is that there are distinctly positive outcomes four days out across all indices. When SMH is very weak over a four-day period, the next four days have been bullish on average. Of the three ETFs, SMH has milked this pattern the most, more than doubling the average gain in SPY. It thus appears that the greatest edge is not only trading to the long side over this swing period, but also trading the very instrument that has been weakest. Let's follow up on this shortly.


John Wheatcroft said...

Sir, I stumbled on this site a little while ago and I'm sorry that I forgot where I got the link, I'd like to thank them.

In that short time you have given me more to think about than 99% of all the other sites I have ever visited and most of the books I have ever read. The only equivalence was when I discovered that one could interpret candlesticks.

I have already put some of your teaching to work. I have been following the VIX in a lackluster manner for some time. But as a result of something you wrote I started observing that indicator in reference to its 10 day average. I find that when it is 5% or more off the average the market reacts. This was never so clear to me before. So thank you for your insights, they have given me hope that there indeed is a way to predict the future. At least in the near term.

And for point of reference, I am 61 years old and still trying to learn things every day.

Brett Steenbarger, Ph.D. said...

Thanks, John, for your kind comments. Your point about lifelong learning is excellent, and one that is so important to trading success. Market patterns change over time, so learning isn't enough. There's always a relearning.

I like your idea of comparing the VIX to its average. Maybe I'll try a little VIX investigation in the near future. Thanks--