Tuesday, August 08, 2006

Cumulative Demand/Supply Index: The Case for the Bears

On this blog and in the Trading Psychology Weblog, I have tracked an indicator that I call Demand and Supply. It consists of an index of the number of stocks trading with significant positive vs. negative momentum. A cumulative line of the daily Demand/Supply numbers has been a very helpful measure of overbought and oversold markets on an intermediate-term basis.

On Friday and Monday, we hit 50 on the Cumulative DSI Line, which is very overbought. When that has occurred (N = 30) since 2003 (N = 871 trading days), the next 10 days in SPY have averaged a loss of -1.34% (5 up, 25 down). That is a huge bearish edge, relative to the average 10-day performance of SPY (up .46%; 514 up, 357 down) for the entire sample.

In my last post, I found a bullish intermediate-term edge associated with the TRIN. Here I find quite a bearish edge. I post this because it is typical of the messiness associated with markets and historical analyses. It is the preponderance of evidence--not the results of any single analysis--that should drive trading and investment decisions.