This research shows why the market seems to go nowhere
I’ve been at this game for a while. My first trade was placed late in
1977, and I’ve traded in some shape, manner, and form every year since
then. I recall the gold boom and bust in the early eighties; the double
digit interest rates; and the liftoff for the great bull market in stocks in
1982. I remember panicked faces at the office coffee pot in October, 1987,
as the market plunged and retirement accounts were down more than a third in the
bat of an eye. The dramatic rise and fall of the Japanese market, record
low volatility, Asian crisis, tech stock boom and bust, the meltdown of interest
rates amidst deflation fears–I’ve seen a fair amount in my trading
career. But I’m not sure I’ve ever encountered so much frustration among
traders.
It’s the active, intraday traders who seem most distressed. Judging
from my email inbox and the traders I know personally, 2006–for all its
auspicious January start–has not been a kind year so far. Even traders
who have been quite successful in years past seem to be frustrated. The
market, from their perspective, seems to be going nowhere–even though they can
see that it has managed to stay near bull market highs.
I decided to do a little statistical investigation to explore the traders’
angst. I went back to March, 2003–the start of the bull move–and looked
at how the S&P 500
(
SPY |
Quote |
Chart |
News |
PowerRating) has moved overnight (between the prior day’s
close and the current day’s open) and how it has moved during the day session
(from open to close). Here’s what I found:
- From 2004-2006, the average price change from close to open (overnight
change) has been .035%, compared with .039% in 2003. The standard
deviation of overnight price change from 2004-2006 has been .29%, compared
with .51% in 2003. The market has thus retained a positive bias
overnight–no doubt thanks to strength in Europe and Asia–but the average
size of the overnight move has decreased significantly.Â
- From 2004-2006, the average price change from open to close (day session
change) has been -.005%, compared with .092% in 2003. The standard
deviation of day session price change from 2004-2006 has been .40%, compared
with .72% in 2003. Thus, day traders during the majority of the bull
market–the last 2+ years–have seen no directional bias to the
market. They have also seen far less total market movement compared
with 2003.
In short, there *has* been no bull market for day traders in the S&P 500
market. Whatever movement there has been in the index is fully
attributable to overnight action. The day market has been flat, and the
average range has declined from 1.40% in 2003 to .95% from 2004-2006.
Indeed, the average range has declined every year from 2003-2006, standing now
at .82%.
Recently, on my research blog,
I investigated trading patterns involving movements in the first hour of the
day, the midday hours, and the last hour of the day. While I found a few
patterns worthy of note, my eventual conclusion was that the statistical edges
in intraday patterns were far less promising than the ones I had obtained over
swing timeframes of 3-5 days. I notice, too, that the TradingMarkets
PowerRatings exploit edges over a five-day period. I don’t think that’s
accidental. Having run literally hundreds of historical analyses, I have
yet to find a recent intraday pattern that provides an edge comparable to the
swing timeframe patterns I’m noticing.
All of this puts the traders’ frustration in perspective. Volume in
ETFs and emini stock index futures has hit record levels during this bull market
and yet price movement has progressively dampened. With more money chasing
less opportunity, many market participants are left without a seat in the
musical chair game of intraday trading. The most frustrated traders, I
find, are those that are ramping up their size and their trading frequency in a
frantic effort to extract whatever movement there is. If trading is a
business, however, perhaps the better strategy is to do what good business
people do when their markets become saturated: change course and pursue
opportunity. That’s how IBM remade itself into a services company; how
Apple went from computer niche to digital music frontrunner.
There *is* opportunity in the marketplace.
It just isn’t where most people are looking.
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.