Thursday, December 08, 2005

Milking a Pattern: NYSE TICK and the Midcaps

Yesterday we looked at how strength and weakness in the NYSE Adjusted TICK were associated with superior and inferior returns 3 and 1 day out in SPY. This made sense because the TICK is capturing short-term market sentiment: the willingness of buyers to lift offers vs. the aggressiveness of sellers in hitting bids. Strong sentiment, when fueling a rising or falling market, does not turn around on a dime: normally buyers will only become bearish after prices retreat and vice versa. What we saw in the SPY data was evidence of price persistence: extremes of sentiment lead to higher prices over 3 days and lower prices over the next day.

Because the NYSE TICK is derived from all NYSE stocks and is unweighted, it should reflect sentiment among small and midcaps just as well as among the large caps. That's exactly what we see with the Midcaps: daily price change in MDY correlates .78 with the Adjusted TICK. However, because--as we saw recently--the Midcaps have been a better trading market (better trending, more volatility), the prospect is there to milk the sentiment pattern even more with MDY than with SPY.

I reran yesterday's analyses using MDY instead of SPY. The same basic pattern emerged:
  • After a strong Adjusted TICK day, the next three day gain in MDY was .56%, much higher than the average change of .20% for the entire sample.
  • After a weak Adjusted TICK day, the next day change in MDY was -.20%, much weaker than the +.07% for the entire sample.

The interesting thing is that the patterns were present with MDY, but to a greater degree. The average's higher volatility allowed traders to milk this pattern. This suggests that it is not only important to identify market patterns, but also the trading instruments most likely to benefit from the patterns.


'Thought & Humor' said...

You have a riveting web log
and undoubtedly must have
atypical & quiescent potential
for your intended readership.

Boas Festas e um feliz Ano Novo,
Feliz Navidad y Próspero Año Nuevo,
Joyeux Noël et Bonne Année!
Fröhliche Weihnachten und ein glückliches Neues Jahr!
Merry Christmas,
Dr. Howdy

'Thought & Humor'

Brett Steenbarger, Ph.D. said...

Thank you for your comment and greetings. Anyone with so many UNC jokes must be, like me, a Duke fan. Best wishes for the holiday--

"Not recently."
The two words that got Dr. Brett kicked out of a Chapel Hill, NC restauarant after being asked by a waitress, "Cream in your coffee?"

Mark Sanchez said...

Could you qualify what you mean when you say a "strong" adjusted TICK reading?

Brett Steenbarger, Ph.D. said...

Hi Mark,

Thanks for the opportunity to clarify. The Adjusted TICK is adjusted to create a zero mean. A strong Adjusted TICK reading, therefore, is above zero, as that suggests an above-average propensity of stocks to trade at their offer price, rather than bid.