Momentum, Value, and Short-Term Movement in the Stock Market

Above is a plot of an interesting measure that tracks the difference between short term and intermediate term new highs minus new lows for SPX stocks only.  (Raw data from the Index Indicators site).  When that difference is highly positive, it means that there has been a short-term rally from relatively oversold intermediate term conditions.  When that difference is highly negative, it means that there has been a short-term plunge from more overbought conditions.  This measure is another way of capturing what I call a Momentum Curve, which is the relationship between strength and weakness across multiple time frames.  

Since the start of 2014, when the high-low difference has been in its most positive quartile, the next five days in SPX have averaged a gain of +.33%.  When the high-low difference has been in its most negative quartile, the next five days in SPX have averaged a gain of +.47%.  Across the two middle quartiles, when the momentum curve is neither positively or negatively skewed, the next five-day change in SPX has been essentially flat.  

What the momentum curve captures are short-term momentum and value effects in the equity index.  These, in turn, reflect the dynamics of intermediate-term cycles in markets and the interplay of volatility, correlation, and directional price movement.  Knowing where you're at in a market cycle is quite valuable in harvesting momentum (price continuation) and value (price reversal) effects in the market.  Essentially all of the market gains over the past year and a half can be attributed to momentum and value factors. 

Further Reading:  The Psychology of Quantitative Analysis
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