Sunday, July 22, 2007

Adjusting the Adjusted NYSE TICK

As readers know, I used an adjusted figure to assess the day's TICK readings (the number of NYSE stocks trading at their offer prices minus those trading at their bids). Specifically, I cumulate each one minute's average TICK reading (high-low-close) after subtracting from it the average TICK level of the past 20 trading sessions. In this way, we see how short-term market sentiment for today compares with recent market history.

With the abolition of the uptick rule, short sellers can now hit bids rather than wait for upticks for their transactions. The net impact, it appears, has been a downward shift in the distribution of NYSE TICK values. From March 1, 2007 through July 2, 2007, the average raw NYSE TICK reading was 253. Since then, the average has been 21.

As I mentioned earlier, if this downward shift is attributable to the end of the uptick rule and its impact upon the location of trade, then we should see a similar shift in the distribution of the Dow TICK (TIKI). Sure enough, from March 1st through July 2nd, the average Dow TICK reading was .37. Since July 2nd, it has been -.53.

Eventually, once we have 20+ trading sessions under the new trading regime, the adjusted TICK will automatically adjust itself. In the interim, I am simply trading with an assumption of a zero mean for the TICK. If, as the trading day evolves, we chart the one minute TICK and have more area above the zero line than below, that will indicate net positive sentiment. If, as on Friday, we have more area below the zero line than above, that will suggest net bearish sentiment.

Most important, I will continue to track shifts in the distribution of the TICK from one time period of the day to the next. These shifts will remain important clues of institutional sentiment whether they're starting from a positive mean or from zero.


Identifying the Sentiment Trend