Saturday, January 07, 2006

Ten-Day Highs: Evidence of Momentum Effects

Yesterday's post found momentum effects with respect to multi-year highs. When we make longer-term highs in a strongly rising market, expectations for gains going forward are better than when we make longer-term highs in a modest uptrend. I decided to explore this as a general pattern by seeing what happens after we make 10-day highs, as was the case Friday. Interestingly, although the market has seemed strong over the past ten days, it is below the average gain of 2.52% that we have normally seen during 10-day highs since 2003.

Looking at SPY since January, 2003 (N = 750), we find that 176 instances of ten-day highs. Three days later, the market is up by an average of .01% (94 up, 82 down), worse than the average three-day gain of .14% (437 up, 313 down) for the sample overall. A median split of the 10-day highs, however, once again shows a momentum effect. When the new highs are made in a strong market, the next three days average a gain of .10% (54 up, 34 down), but when new highs are made in a weaker market, the next three days average a loss of -.08% (40 up, 48 down).

This suggests that the present market does not have an edge relative to historical averages with respect to the next three days and may even be at a disadvantage. Markets that make 10 day highs but show 10-day rates of change of less than 2% have underperformed those that make 10 day highs with stronger momentum.

4 comments:

Casey said...

Like your Traderfeed.How about the Dow theory , in this instance , where the Transports have definitely made new highs and there is a good probability of the Industrials doing the same?

Brett Steenbarger, Ph.D. said...

Hi,

I did some research on this a while ago and found better results when using the Utilities to confirm the Industrials than the Transports. It's a good idea, though, and I can update that study. Thanks for the suggestion.

Brett

D TradeIdeas said...

We took your observations and created parameters within Trade-Ideas that would reveal the momentum of stocks with 10-day highs. After liking what we saw I decided to create the same model but look instead for highs of 8-days thereby looking for stocks with enough momentum to reach 10 and possibily beyond. Here's the post: Trade-Ideas Strategy Session

Brett Steenbarger, Ph.D. said...

Thanks, David, for that excellent implementation in Trade Ideas. I like the way the software can take research ideas and make them useable in real time.

Brett