What does GOOG mean to Gold?
Few stocks of late have commanded as much attention as
Google, the high-flyer
that has risen from a price of 100 in August, 2004 to its current price of
approximately 443. When the stock dropped 37 points on Friday,
(
GOOG |
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PowerRating) made
headlines. Since then, however, it has roared back, gaining over 10% in
the past two trading sessions.
Is GOOG representative of the market, however? My initial look at the
question, which is posted to my free
research blog, suggests that strength in GOOG tends to be followed by
strength in the large cap S&P 500 Index
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SPY |
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PowerRating). This led me to wonder if
other speculative sectors, such as gold stocks
(
XAU |
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PowerRating), might also serve as a
bellwether.
The daily price change correlations among GOOG, SPY, and XAU are modest, as
shown in the Table below. Movements in GOOG and XAU account
for only about 6% of the total movement in SPY. Interestingly, GOOG and
XAU are essentially uncorrelated, despite my initial thought that both might
represent speculative market sentiment. The question, however, is whether
more significant patterns emerge between the two when we look at large rises in
GOOG, such as we’ve seen so far this week.
SPY |
GOOG |
XAU |
|
SPY |
.21 |
.26 |
|
GOOG |
.08 |
Table: Correlations in daily price changes: August, 2004 –
Present
Over the 353 trading sessions since August, 2004, I found 30
occasions in which GOOG was up more than 5% in a two-day period. Three
days later, the average gain in SPY was .56% (20 up, 10 down)–much better than
the average gain of .12% (206 up, 147 down) for the sample overall. When
speculative juices are running high in GOOG, as is the case over the past two
days, that has boded well for stocks in the short run.
But here’s the really interesting finding: During the 30 days of
GOOG strength, the average three-day gain in XAU (remember, these are
uncorrelated) has been 1.26% (21 up, 9 down)–much stronger than the average
three-day gain of .26% (187 up, 166 down). In other words, good GOOG days
have also been good gold days. When GOOG is strong, gold also seems to
benefit from speculative fervor.
How are stocks affected when GOOG is good as gold? When
GOOG is up by more than 5% in a two-day period and XAU is up by more than 1% in
that same time frame (N = 15), SPY averages a gain over the next three days of
.91% (11 up, 4 down). When GOOG is up by more than 5% in a two-day period
and XAU is up less than 1% (N = 15), the average three-day gain in SPY is only
.20% (9 up, 6 down). Alas, XAU is up .83% over the past two days,
tempering our near-term expectations for stocks. For now at least, all
that glitters is not GOOG.
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.