Readers of this blog know that I rely upon the NYSE TICK as a short-term measure of market sentiment. Most of my studies have focused on the Cumulative TICK and momentum effects in the market, as well as patterns in the distribution of TICK values intraday. In this post, however, we'll examine the importance of single, extreme readings in the TICK.
On Wednesday, in the wake of selling on the release of the Fed minutes, we hit an NYSE TICK reading below -1200. This suggests very broad selling, with more than 1200 issues trading at their bid price vs. their offer. When selling becomes that extreme, what tends to come next?
Since 2004 (N = 695 trading days), we've only had 50 days in which the NYSE TICK has gone below -1100. Two days later, the S&P 500 Index (SPY) is up on average .37% (31 up, 19 down). That is quite a bit stronger than the average two-day gain of .06% (367 up, 328 down) for the entire sample.
Conversely, when the daily NYSE TICK never goes below -500 (N = 45), the next two days in SPY average a loss of -.14% (21 up, 29 down), notably weaker than average.
In other words, extreme selling seems to be bullish; the absence of extreme selling brings subnormal returns. Panic selling, in particular, tends to produce short-term trading opportunities.
Interestingly, on the panic selling days, if there is not a significant *buying* episode that day--an NYSE TICK reading stronger than +1100--the next day in SPY averages a *loss* of -.12% (11 up, 13 down). If there is a strong buying period on a day that features panic selling, the next day in SPY averages a next day gain of .54% (19 up, 7 down).
Extreme selling by itself cannot create a bull move. It's when panic selling draws in buyers--something we did on Wednesday--that short-term returns tend to be favorable. Average NYSE TICK readings are summarized daily on the Trading Psychology Weblog; going forward, I will also flag daily extremes.
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2 comments:
Hi Brett,
With today's very strong move, the Naz is fast approaching its peak of about six months ago.
For the past month or two, I have frequently read from various sources how the breadth (and other) figures simply don't support an across-the-board market move up for any length of time. It was also continually noted by some that the Dow and select large-cap issues were the mainstays, and that the small and mid-caps were lagging badly. {also said that there were very few good looking setups for longs} Well, now I note the Naz moving up so well and IWM (if I recall properly) has also gained much momentum.
I don't know what it might mean to stall out near the high of half a year ago. I also see that (per the weekly charts at least), the down weeks following those prior peaks had higher volume than what we have now.
Still, the price on the main indices seems to suggest we're in a bull market, despite some of the volume and breadth figures being less than dominant.
I know you generally look shorter term and may not feel comfortable giving an analysis on the intermediate and longer term in the markets. However, any thoughts would be great to contemplate.
Thanks
Hi,
FWIW, my longer-term perspective is that we're in the late stages of a bull market, in which some stocks (mostly large cap value) are making new highs and others (mostly small/mid cap growth) are not. The challenge for the longer time frame trader/investor is to identify the sectors that are outperforming and concentrate on those. This became tricky after May, as commodity related issues that had been strong began to underperform and large caps came to the fore.
Brett
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