Tuesday, March 07, 2006

Strong Dow, Weak Speculative Stocks

Hope you've been able to profit from the trend/momentum and interest rate/stock relationships we've been seeing. It's been a bit tricky if you've been trading the large cap indices such as the S&P 500, because there has been a huge divergence in performance between those large caps (stronger) and the secondary issues (weaker).

I noticed, for example, that the Dow Industrials (DIA) were actually up on the day, while my basket of Speculative Stocks was down by over 1.5%. That is quite a gap. Going back to January, 2003 (N = 797), I could only find eight occasions in which the Spec stocks were down by more than 1%, but the Dow was up. Three days later, the Dow was up seven of those eight occasions by an average of .91%--much stronger than the average three-day change of .10% (435 up, 362 down) for the sample overall. It appears that, when the Spec stocks have been down sharply, they--and the rest of the market--tend to rebound three days out.

Interestingly, if we just look at occasions in which the Dow is up, but Spec stocks are down (N = 60), the next day the Dow is down by an average of -.13% (26 up, 34 down) and the Spec stocks are down even more. This fits with other research I have done: When Spec stocks underperform the Non-Spec issues, the next day sees some follow through in weakness. A reasonable scenario for the market, then, might be weakness tomorrow followed by a rebound.

Tomorrow AM, I will post a different analysis, tracking market performance after several consecutive down days.