Thursday, July 27, 2006

When Stocks Contradict the Stock Market

Yesterday we had a rising market, but the number of stocks making fresh 20-day lows increased, even as we had an increase in new 20-day highs. What happens when stocks contradict the market and expand new lows on rising days and expand new highs on falling days?

Since September, 2002 (N = 963 trading days), we've had 92 occasions in which the market (SPY) has risen on the day with expanding new 20-day highs, but also with expanding new 20-day lows. This is what we saw yesterday. The next day of trading, SPY was down by an average -.20% (42 up, 50 down). That is much weaker than the average one-day gain of .04% (517 up, 446 down) for the entire sample. Conversely, when SPY has fallen for the day, but new highs have expanded as well as new lows (N = 84), the next day in SPY has risen by a strong .19% (54 up, 30 down). It thus appears that market moves that are contradicted by the stocks tend to reverse the next day. It is but one more reminder that the market of stocks does indeed affect the stock market.


John Wheatcroft said...

That is an interesting finding. I've never looked at it but I will from now on.

I have been following the advancing stocks ratio for some time (simple - ratio of stocks advancing in the region of all stocks listed greater than $1). It has been declining over the past several days which generally means a weakening market. Of course that is very obvious from just looking at the daily open-close range over the past several days.

But I'm wondering - you have a identified a number of singularities. What happens when you start combining these various data points? Do you get similar, better, worse results? I'm sure you have tried it - care to share?

NO DooDahs said...

I'm curious about the timing of these events.

We're going through a sector rotation right now, and as that happens, it appears to me that both new highs and lows should increase as the market sells off the old bulls and buys the new ones.


Brett Steenbarger, Ph.D. said...

Hi John,

Thanks for your observation. I do, indeed, find that results are better when you combine several independent historical patterns. This limits the number of clear signals you get, but those you get are more reliable.


Brett Steenbarger, Ph.D. said...


Very nice observation. I think the simultaneous expansion of new highs and new lows probably does signify sector rotation--and it certainly signifies that not all stocks are participating in the movement of the overall average.