Tuesday, July 03, 2007

Pre-Holiday Trading Ideas

* Strong Sentiment - We've had four consecutive days of strong NYSE TICK, with my cumulative Adjusted TICK measure averaging over 500 per day over that period. Interestingly, going back to 2004 (N = 870 trading days), when we've had four consecutive up days in the TICK, the next five days in the S&P 500 Index (SPY) have averaged a loss of -.07% (39 up, 41 down). When the Adjusted TICK over those four days has averaged over 500, however, the next five days in SPY have averaged a healthy gain of .50% (9 up, 6 down). When the Adjusted TICK has averaged below 500, the next five days have averaged a loss of -.20% (30 up, 35 down). As we saw on Monday, it's difficult to fade a market in which large traders are persistently lifting offers across a broad range of stocks.

* Stock Splits on the Rise - I notice that, in the past 30 days, we've had 63 stock splits among the Investors Business Daily 6000 stocks. While that is not a high level historically--we had over 200 splits in June, 1998 and 120 in April, 2000--it does represent a 20-week high for this measure. Going back to 1990 (N = 874 trading weeks), when stock splits have hit a 20-week high, the next 20 weeks in the Dow Jones Industrial Average have averaged a below average gain of 2.62% (81 up, 41 down). When splits have hit a 20-week low, the next 20 weeks in the Dow have averaged an above average gain of 5.38% (88 up, 29 down). All other occasions have averaged a 20 week Dow gain of 3.93% (444 up, 191 down). By the time many stocks have risen enough to warrant a split, the Dow has made much of its gains and, on average, upside has been limited. Conversely, after a bear market, stocks have made much of their declines, splits are not warranted among most stocks, and there has been greater upside potential.

* Happy Anniversary - I see that Charles is celebrating his 14th. Can't tell you how important the spouse is to a trading career. Here's a great NY Times story about how a marital partnership has been building a major league career. And, BTW, Mr. Kirk has some excellent links on his site, including a post about the continued potential in agricultural commodities.

* How the Calendar Affects Trading Results - Great compilation of posts from the CXO Advisory Blog. Check out the study showing strength prior to the July 4th holiday; weakness thereafter. See also the holiday analysis of Bespoke Investment Group.

* Achieving Better Risk-Adjusted Returns - John Hussman's very interesting post for Seeking Alpha offers some insight into factors that drive the market longer-term, suggesting a model that has outperformed the market going back to 1965.