Wednesday, April 08, 2009

Too Much Data, Too Little Information: Further Uses for the Stock Basket

The recent post that showed how I display my basket of 40 stocks highlighted the ease with which traders can track their intraday advances vs. declines. This very much helps us see when markets are mixed in their price behavior (some stocks and sectors rising from the open, others declining) and when they are trending.

A second use of the basket is to identify strongest and weakest sectors. Above we see closing quotes for the basket; note how the Consumer Discretionary and Energy stocks finished up from their opening prices, whereas Financial shares were sharply lower. Other sectors, such as Technology, were mixed, with some stock up from their open, others down. Recognizing this mixed market was key to fading intraday moves in the ES futures, such as when we attempted to break above Tuesday's highs and could not sustain buying interest.

Note that we can become even more sophisticated. Recall that I post relative volume numbers periodically for the ES futures. These represent the average volume we would expect to see at the end of each 30 minute period of trading during the day. Gauging today's volume versus these averages helps us understand when large traders are active in the market (and thus when we can sustain large market moves).

Suppose, however, we add a column to the market display above and track volume for each stock. With a little research, we could compare the current volume in each stock with the average volume for that time of day. That would tell us whether large traders are active in particular sectors, which is valuable information if we're selecting particular stocks to trade or if we're constructing pairs trades.

I am absolutely convinced that, when traders do not succeed, it is often because they have too much data and too little information. The challenge for an intraday analyst is to package and deliver the most important information in the most user-friendly and timely manner. More on this topic to come...