Will the Selling Continue? Short-Term Sentiment Can Tell You
For the past several days on my free
research website I’ve been examining the role of breadth and momentum in the
continuation and reversal of market rises and declines. It turns out that
both rises and declines are more likely to spill over into upcoming sessions
when a large number of stocks display upward or downside momentum.
Perhaps, I thought, this spillover occurs because broad and steep declines
produce short-term extremes in sentiment that impact the following days’ trade.
As a way of testing this, I looked to a direct measure of sentiment: the NYSE
TICK. The TICK is displayed by most real-time quote vendors as $TICK, and
it measures the number of NYSE issues trading on upticks vs. the number trading
on downticks. This is sometimes described by technicians as an
overbought/oversold index, but that is misleading. It is better to think
of the TICK as a sentiment measure, because it is assessing the willingness of
market participants to facilitate trade either at the offer price (meaning that
buyers are willing to pay up to own the stock) or at the bid (suggesting that
sellers will give up the edge to get out of the market). By tracking where
the TICK is trading relative to its mean value (what I call the Adjusted TICK, displayed
daily on my site), you have a nice measure of whether bulls or bears are
more aggressive in the marketplace. This correlates very well the market
trend at the time.
The question, however, is whether the Adjusted TICK affects market results
going forward. When traders are hitting bids (bears are aggressive), does
this spill over to the next day’s trade?
Thursday’s market offers us a relevant opportunity for exploring this
question. The S&P 500 Index (SPY) declined by over 1% on a very weak
Adjusted TICK reading of -727. Since July, 2003 (N = 648 trading days),
we’ve had 56 days in which SPY has declined by more than 1%. The following
day, the market has been up by an average .09% (33 up, 23 down), stronger than
the average one-day gain of .04% (326 up, 266 down) for the remainder of the
sample.
If we break down the 1% declining days by their Adjusted TICK values,
however, a pattern emerges. A median split (dividing the sample in half
based on the Adjusted TICK value) shows that when the market declines 1% or more
and the Adjusted TICK is very weak (less than -650), the next day’s average
change is -.07% (15 up, 13 down). When the market declines 1% or more and
the Adjusted TICK is stronger, the next day’s average change is .25% (18 up, 10
down). This supports the notion that market weakness tends to spill over
the next day when sentiment becomes highly bearish–as was the case
Thursday. When the market declines over 1% but sentiment is not gloomy,
the next day is more likely to show a bounce. In fact, when the Adjusted
TICK was greater than -450 on those down days, the market was up the next day 14
out of 17 times.
Where can inquiring minds obtain the NYSE TICK? Most real-time vendors
carry historical data on their servers for downloading. A larger database
is available from Tick Data. TICK
measures specific to the S&P 500, including historical data, are available
as part of the NeoTicker trading platform.
My research has found it to be one of the best short-term measures of trader
sentiment available.
Brett N. Steenbarger, Ph.D. is Associate Clinical
Professor of Psychiatry and Behavioral Sciences at SUNY Upstate Medical
University in Syracuse, NY and author of The
Psychology of Trading (Wiley, 2003). As Director of Trader Development
for Kingstree Trading, LLC in Chicago, he has mentored numerous professional
traders and coordinated a training program for traders. An active trader of the
stock indexes, Brett utilizes statistically-based pattern recognition for
intraday trading. Brett does not offer commercial services to traders, but
maintains an archive of articles and a trading blog at www.brettsteenbarger.com
and a blog of market analytics at www.traderfeed.blogspot.com.
He is currently writing a book on the topics of trader development and the
enhancement of trader performance.