Today was a great example of a low-quality stock market rally. We opened to the upside, advancing stocks led decliners, and NYSE TICK was strong through the morning, with a positive slope to the Cumulative TICK line.
Two elements, however, made the rise low quality:
1) It was a mixed market - As my Twitter post early in the morning noted, sector participation in the rise was far from uniform. NASDAQ and small cap stocks were underperforming the S&P 500 Index. Industrial stocks were strong in the morning; consumer discretionary shares could not best their opening levels. In a good trend, sectors move in unison. Mixed markets suggest that there is correction occurring as well as strength.
2) The market was inefficient - An efficient market is one that achieves a high degree of price movement for a given unit of buying interest (such as NYSE TICK or advance/decline). An inefficient market is one that struggles to move higher, even as there is net buying pressure. How do we know a market is struggling? If the market needs considerable time simply to break out of its overnight range or to touch R1, then its rise is less efficient than that of a market that hits R1 very early in trade.
Mixed, inefficient markets are low quality markets, and low quality markets are ones that are ripe for reversal. That is why, in my Twitter post at 12:57 CT, I quickly noted the possibility of reversion back into the morning trading range.
A rise is not a rise is not a rise. There is more to markets than the price movements of capitalization-weighted averages. By seeing how various components of markets are moving and by gauging the trajectory of market moves, we can make meaningful inferences as to whether rises are likely to persist or reverse.
As I can (this week is on the road working with traders), I will update Twitter with intraday observations to help illustrate these patterns (free subscription here).
.
Subscribe to:
Post Comments (Atom)
Posts
7 comments:
Yep, I noticed the lack of quality. Not surprising this being the fifth day of the rally. So in the morning I traded very disciplined, knowing the house of cards was likely to collapse.
Then in the afternoon, I gave away my gains like a doofus. I was pissed off by not making (what I consider) nearly enough during the bull tear this week, especially last Tuesday when I left 90% of my normal short squeeze gains on the table.
So even though I could see the market starting to roll over, I was determined NOT TO LEAVE GAINS ON THE TABLE, so I bought back in during the slide, saying to myself it was just a pullback.
At least my discipline forced me to stop out above breakeven (although lots of commissions today meant a slight loss of capital on the day).
Not my finest day of trading. At least I have learned how to keep a mistake like this from inflicting a smoking crater in my P&L. Tomorrow's a new day. . . And I will remember -- leaving gains on the table is the price you pay for more consistent profitability and fewer losses. It's a trade I'm happy to make, and I'll remember why I make it. . .
Dr. Brett,
I absolutely love your site and have already ordered your new book, can't wait to get it.
I subscribe to your twitter feed and when I received the twit "watching to see if we sustain move back into range, given more selling pressure.", I'll be honest, I had no idea what you were trying to say? Maybe it will just take me some time to get used to your way with words.
Hi Matthew,
That's an excellent learning experience. Many times we make trading decisions because of our frame of mind, not because of what markets are telling us. Thanks for being willing to help us all learn from your experience--
Brett
Hi Brian,
Point well taken. I dashed off the "tweet" between meetings with traders and wasn't clear. When I speak of buying and selling pressure, I'm generally referring to trends in NYSE TICK and Market Delta. I should have also specified that I was focusing on the market's overnight range. Given that we were seeing a weaker NYSE TICK (more selling pressure), I was watching the market closely to see if we would sustain the reversion into/through that overnight range. I appreciate the feedback--
Brett
Dr Steenbarger,
I also love your site.
And I am also a bit puzzled re. "trends", as trends can be broken with a very short notice.
Today after 11am it was an up day (TICK, TRIN), trend that changed between 1-3pm, to only change again.
The "trend" is always behind you, while a change may happen at any moment. When do you enter the market?
Waiting for a trend "confirmation" for 1hr or 2 hrs offers no protection against losses, as we saw today - if the same criteria (time to confirm a trend change)is used for entry as well as exit points.
How do you deal with those days?
Thanks,
OV
Thanks for the clarification. I found your twitter posts this AM to be much easier to understand. I assume that the inability of the ES to trade below its VWAP in the morning trade should have tipped me off that we were shifting from a consolidation day to a potential trend day. Unfortunately I missed the signal
Hi OV,
If you identify a trend and you see that a countertrend movement is occurring on lower volume and volatility, then it makes sense to go with the idea that the trending move will have at least one more leg to it. It's the inability to rise in a falling market or drop in a rising one that sustains the trend--
Brett
Post a Comment