Wednesday, March 15, 2006

Strong NASDAQ, Low TRIN: Short-Term Results

First off, I want to thank readers who have suggested ideas for research and who have provided helpful feedback re: this and the Trading Psychology sites. Thanks also to readers who have shown interest in The Psychology of Trading; for it to have cracked the top 10,000 on Amazon three years after its publication is a testament to the enduring relevance of psychology for trading. My new book, Enhancing Trader Performance, is undergoing editing and should be published this fall.

A reader very helpfully pointed out that strong gains accompanied by low TRIN readings are bullish on a next day basis. Recall that my analysis yesterday showed weakness over the intermediate term. Fortunately today provided an opportunity to test the reader's idea: We have closed higher by 2.56% on the NASDAQ 100 ETF (QQQQ) over the past two days. The NASDAQ TRIN during that time has averaged .496.

Going back to March, 2003 (N = 762), I found 81 instances of a two-day rise of more than 2% in QQQQ. Over the next two days, QQQQ was higher by an average .26% (50 up, 31 down), stronger than the average two-day rise of .15% (413 up, 349 down) for the broad sample. When, however, QQQQ was up by more than 2% on a two-day basis and the TRIN averaged less than .50 over that same time (N = 20), the next two days were up by an average of .54% (13 up, 7 down). Score one for short-term bulls and for an astute reader.


John Wheatcroft said...

Have you done any work comparing the demise of the VIX to increased use of ETFs? It seems to me that about the time that ETFs started to become readily available a lot of the retail trade in individual stocks dried up and the VIX took its dive to its current miniscule levels.

Nasdog1 said...

Has anyone attempted to recreate Dr. Steenbarger's calculations on other markets? I'm referring to his results on volatility and trendiness on S&P stocks and the nastiness of the trading conditions. I could attempt to do it myself but would love to take a shortcut. I'm not a master mathemetician nor am I a good programmer of excel.

Brett Steenbarger, Ph.D. said...


FWIW, I'm in the process of replicating the work in the Euro currency market and will be further investigating volatility and trending among individual stocks and sectors.


Brett Steenbarger, Ph.D. said...

Good question, John. As my recent article indicated, the current low volatility is not so unusual when we take a 70 year look at market history. It's the combination of low trending *and* low volatility that make this period unusual. I do suspect that the ETFs contribute to low volatility because of the arb trade between ETFs and futures, between both and baskets of stocks, and among ETFs. This arb trade tends to fade moves in any one instrument when that instrument gets out of line with the others, thus reducing trend and volatility.