Thursday, May 24, 2007

Market Psychology and Trader Psychology: Thoughts for a Thursday

* More on Extreme Negative Sentiment - Here's a post I sent to a distribution list of traders after we hit an extreme negative level in the NYSE TICK on Wednesday:

I show that, since 2004 (N = 848 trading days), we've had 61 occasions in which there has been at least one daily NYSE TICK reading of -1100 or lower. Five days later, we've averaged a gain in SPY of .65% (43 up, 18 down). That is stronger than the average five-day gain of .19% (493 up, 355 down) for the entire sample.

It turns out that we hit another such negative extreme today. Going back to 2004, we've only had 48 occasions in which we've had back to back daily readings of less than -1000 in the NYSE TICK. Five days later, SPY has averaged an impressive gain of .83% (36 up, 12 down)--again much stronger than the average five-day gain for the sample.

* Great Research on the NYSE TICK - In his latest newsletter, Rainsford Yang has replicated my research on the Cumulative Adjusted TICK and charted it long-term to show how this indicator has consistently led market rises and declines. Rennie has graciously offered readers of TraderFeed a renewable 25% discount on a subscription to the newsletter. I'm not financially affiliated with MarketTells, and I don't benefit from subscriptions, but I can tell you that I am a paid subscriber and greatly respect Mr. Yang's work. If you're interested in the discount, just enter "traderfeed" where the subscription form asks you for a promotional code.

* Trade Ideas on the Web--Backed by Research! - Every day James Altucher is putting out value by tracking "system trades of the day" on the StockPickr site. You not only see the ideas, but how well they performed over recent market history. I continue to believe this is one of the Web's best information sources for traders and investors.

* More on the Turtles - I recently addressed some of the psychological challenges associated with investment (as opposed to short-term trading). It turns out that Michael Covel has addressed this topic on his site and will also be tackling it in a forthcoming book. I look forward to reading and reviewing that book.

* Brain Fitness - Here's an excellent collection of resources concerning brain fitness and cognitive neuroscience from SharpBrains. Once again, I have no commercial relationship with this firm, but I applaud their commitment to trader education.

* Rising Interest Rates Taking a Toll? - I find it difficult to believe it's a coincidence that the number of stocks making new 65-day highs topped out in mid-April, which is also when 10-year interest rates bottomed. Since then, rates have risen to over 4.9% intraday today--one factor that may be playing into the stock market weakness today. I am very curious to see how the market would tolerate a move above 5%.