Look for what seems out of place
You know the way
It throws about
It takes you in
And spits you out
When you desire
To conquer it
To feel you’re higher
To follow it
You must be clean
With mistakes
That you do mean
Move the heart
Switch the pace
Look for what seems out of place
Cuts You Up
Peter Murphy
Peter Murphy’s song has to be about trading the markets.
Only a trader could possibly feel that cut up.
Perhaps Murphy is a trader himself. Traders know that to
“follow it you must be clean” and “look for what seems out of
place.”
A lot has been out of place in the recent market.
Specifically, the Dow Jones Industrial Average has been down over half a percent
in the past two days, while the small-cap Russell 2000 stocks have been up more
than half a percent in that same period. As I mention on my website,
we’re seeing strong institutional selling of the large caps, but the midcap
issues and small caps have remained relatively unscathed.
So what does history tell us happens when such things are out of
place?
It turns out that, since January, 2003 (N = 733 trading days),
the average two-day change in the Dow has been .07% and the average two-day
change in the Russell has been .16%. After occasions where the Dow has
been down by more than half a percent in two days (N = 206), the next two days
have yielded average gains of .11% in the Dow and .07% in the Russell. No
real edge there.
When, however, we’ve had the Dow down by more than half a
percent in two days and the Russell up by more than that amount in the same time
period (N = 14), the Dow has been up by .37% over the next two days and the
Russell has been up by an average of .71%. In fact 11 of the 14 Dow
occurrences were profitable for bulls; 12 of 14 were profitable for Russell
traders.
We’re up this morning as I write. I suspect Peter Murphy,
looking for what’s been out of place, is not so cut up.
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.
He is currently writing a book on the topics of trader development and the
enhancement of trader performance.