Thursday, July 27, 2006

When Stocks Contradict the Stock Market

Yesterday we had a rising market, but the number of stocks making fresh 20-day lows increased, even as we had an increase in new 20-day highs. What happens when stocks contradict the market and expand new lows on rising days and expand new highs on falling days?

Since September, 2002 (N = 963 trading days), we've had 92 occasions in which the market (SPY) has risen on the day with expanding new 20-day highs, but also with expanding new 20-day lows. This is what we saw yesterday. The next day of trading, SPY was down by an average -.20% (42 up, 50 down). That is much weaker than the average one-day gain of .04% (517 up, 446 down) for the entire sample. Conversely, when SPY has fallen for the day, but new highs have expanded as well as new lows (N = 84), the next day in SPY has risen by a strong .19% (54 up, 30 down). It thus appears that market moves that are contradicted by the stocks tend to reverse the next day. It is but one more reminder that the market of stocks does indeed affect the stock market.