Wednesday, June 07, 2006

When Buyers and Sellers Duke It Out

Many times, worthwhile trade ideas come from observations of unusual market events. On Tuesday, for example, we had squalls of selling and bouts of heavy buying. Recall from my recent posts that the Institutional Composite measure consists of two components: Institutional Buying and Institutional Selling. As noted in the Weblog, we had unusually high levels of both on Tuesday. That led to ask, "What has happened in the past when buyers and sellers duke it out?"
Since July, 2003 (N = 734), we have had 22 occasions in which Buying has been above +400 and Selling has been below -400. The next day in SPY has averaged a gain of .32% (15 up, 7 down), much stronger than the average single-day gain of .04% over the entire period.

Conversely, when Buying is under -400 and Selling has been above +400 (very little buying and very light selling; N = 21), the next day in SPY averages a loss of -.15% (7 up, 14 down)--much weaker than average.

In short, active market participation by buyers and sellers appears to have more favorable short-term outcomes than occasions in which both buyers and sellers sit on the sidelines. There weren't many sideline-sitters on Tuesday.