Saturday, April 01, 2006

NYSE TICK Extremes: An Intermediate-Term View

I decided to take a longer-term look at the daily high and low NYSE TICK values and what they mean for future returns. For this analysis, I looked at the number of trading days in a 10-day moving period in which the low value of the day's TICK was less than -1000. This covered the period March, 2003 to the present (N = 768).

I found 29 occasions in which we had either five or six days in a ten-day period in which the low TICK was under -1000. Ten days later, SPY was up by a very large 1.47% (24 up, 5 down). That is quite an edge compared to the average 10-day gain of .61% (474 up, 294 down) for the sample overall.

I also examined 10-day occasions in which we had no daily TICK readings below -1000. If those occurred in 2003, the average gain in SPY over the next 10 days was an eye-popping 1.51% (86 up, 34 down). Since 2004, however, the average gain in SPY over the next 10 days has been an anemic .18% (76 up, 63 down).

In short, a clustering of selling pressure days have yielded superior upside returns. An absence of selling pressure was quite bullish during the earliest phase of the bull market, but since then has produced subnormal returns. Indeed, since August, 2005 (N = 27), a lack of selling pressure has led to higher prices only 7 times. Fading an absence of selling has been a fruitful strategy of late.