Tuesday, July 25, 2006

Big Swingin' TICK Days in the Market

Yesterday's post took a look at sentiment on a longer-term basis; today we'll look at a very short-term measure of sentiment. The NYSE TICK tracks the cumulative difference in the number of stocks trading at their offer price minus those trading at their bid. As a result, it is an excellent measure for identifying the degree to which traders in the broad market are aggressive buyers (transacting at the offer across many different stocks) vs. aggressive sellers (hitting bids across many issues).

Each day in the Trading Psychology Weblog, I provide a daily summary of a version of the NYSE TICK that is adjusted to create a zero mean. Positive values of the Adjusted TICK thus indicate net positive short-term sentiment on the day, while negative values reveal net negative short-term sentiment.

Monday was truly a big swingin' TICK day: We were up solidly from Friday's close to Monday's open and then added significantly to the gains through the session on a strong Adjusted TICK. This means that there was strong positive sentiment, and that sentiment was carried out in action.

I went back to July, 2003 (N = 765 trading days) and found only 10 big swingin' TICK days in the S&P 500 Index (SPY). Those occasions had to be up from the previous close to the current open by more than .30% and had to be up from open to close more than .50%, with an Adjusted TICK greater than +700.

Interestingly, two days following the big swingin' TICK day, SPY was down by an average of -.50% (3 up, 7 down)--much weaker than the average two-day change of .06% (403 up, 362 down) for the entire sample.

What is even more striking is that strong TICK days that are *not* big swingin' TICK days (i.e., that aren't up strongly close to open and again from open to close; N = 47) have quite favorable expectations over a two-day horizon. Specifically, they are up on average by .27% (27 up, 20 down).

What this suggests is that there is a tendency for the market to correct in the near term when highly positive short-term sentiment provides sustained price gains. A hard man may be good to find, but the market apparently doesn't like big swingin' TICKS.