Friday, March 31, 2006

Weak Daily TICK: What It Means

What does it mean when the NYSE TICK hits a very low value during the trading day? I went back to March, 2003 and investigated all instances in which the TICK hit a value of -1000 or less. This occurred 108 times out of 775 trading sessions.

One day later, the average price change in SPY was .15% (64 up, 44 down), stronger than the average daily price change of .06% (432 up, 343 down) for the sample overall. It thus appears that a day of strong selling pressure results in favorable expectations the next day.

I took the analysis one step further, however. I broke down the strong selling pressure days into those in which the absolute value of the high TICK for the day was lower than the absolute value of the low TICK (N = 52) vs. those in which the absolute value of the high TICK for the day was higher than the absolute value of the low TICK (N = 56).

Thus, we're looking at high selling pressure days with low buying pressure vs. high selling pressure days with high buying pressure.

One day after the high selling/low buying days, the average change in SPY was only .01% (27 up, 25 down)--weaker than the overall market average gain. One day after the high selling/high buying days, the average gain in SPY was an impressive .29% (37 up, 19 down)--much stronger than average.

It thus appears that strong selling pressure without countervailing buying interest tends to carry over the next day, creating subnormal returns. Strong selling pressure matched by strong buying interest creates superior returns.