Monday, December 26, 2005

Dow Industrials and Utilities

While traders marvel over the performance of GOOG and AAPL, the Dow Utilities have quietly doubled in value over the past three years--not bad for a collection of stocks once thought for widows and orphans. Accordingly, I thought it would be interesting to see how the Dow Utilities fared as a predictor of the Industrials.

Over the past seven trading sessions, the Industrials have been essentially unchanged, but the Utilities have declined by about 1.2%. Going back to January, 2003 (N = 745), I decided to look at flat periods when the Industrials were up or down within .30% over a seven-day period (N = 93). Seven days later, the Industrials averaged a loss of -.30% (44 up, 49 down), worse than the average seven-day change for the entire period (.23%; 412 up, 333 down).

A median split based upon the Utilities, however, reveals a pattern. When the Utilities have been strong while the Industrials have been flat over a seven-day period(N = 47), the Industrials have lost an average -.60% (20 up, 27 down) over the next seven sessions. When the Utilities have been weak during flat seven-day periods in the Industrials, the next seven days in the Industrials have averaged .02% (24 up, 22 down).

In short, when the Industrials have showed relative strength compared to the Utilities on a seven-day basis (as they have recently), they have performed better over the next seven days than if they show relative weakness. While there is no upside edge in the pattern at present, neither is there a significant downside one.

6 comments:

Audacity17 said...

Brett, what type of software are you using to test?

Brett Steenbarger, Ph.D. said...

Hi,

I have daily and intraday data from a variety of sources, including Townsend RealTick, e-Signal, and Pinnacle Data. All data are archived in Excel, and I use the database functions within Excel for the analyses. I perform more complex (non-linear) analyses with software by Salford Systems (www.salford-systems.com), but do not post these. Too complicated. :-)

Audacity17 said...

Thank you for your quick response. I have been a trader for about 10 years. After blowing up, learning to break even and finally showing profits, I have become very aware of positive vs negative expecation and the need to test ideas. Your site(s) always have good ideas and I hope to contribute in the future.

Brett Steenbarger, Ph.D. said...

Hi,

Thanks for your note. My experience, FWIW, is that when I see a statistical edge in the market (say, to the upside) and *then* see sellers in the market pulling their offers and/or buyers lifting them, it gives me tremendous confidence playing that move. It's like having two sources of edge: one from historical patterns, the other from reading real-time volume patterns.

Audacity17 said...

Very good point. I have learned, for me anyway, that anticipation followed by confirmation or rejection is very important to being successful in trading. Probably other things in life as well.

TraderJay said...

Hi -- In the past the greater significance of the Utility Index's performance has been on interest rates, i.e. rallying Utes presage lower rates FWIW