Saturday, February 25, 2006

More On Speculative Stocks - A Promising Predictor

What I'm finding in the very large baskets of Speculative and Non-Speculative issues that I am tracking is that they are more predictive of large index performance (such as ES, SPY, QQQQ, NQ) over longer timeframes than shorter ones. This has interesting implications for managing a trading portfolio to maximize opportunity. Increasingly I'm seeing where the common strategy of holding positions intraday only to minimize risk also minimizes important opportunities.

Let's take the current situation as an example. My basket of Speculative stocks is slightly down on the week. The Non-Speculative stocks, however, are up by over half a percent. Going back to March, 2003 (N = 743), I found 66 occasions in which the Spec stocks are down on the week by less than .40%. Ten days later, the S&P 500 Index (SPY) has been up by an average of .31% (41 up, 25 down), no different from the overall sample.

If we divide the sample in half based on the relative performance of Non-Spec stocks, a pattern emerges. When the Spec stocks are mildly weak on a five-day basis, but the Non-Spec stocks are strong (as at present), the next ten days in SPY are up by only .09% (17 up, 16 down). When the Spec stocks are mildly weak, but the Non-Spec stocks are weak, the next ten days in SPY are up by a whopping 1.22% (24 up, 9 down).

With the Non-Spec stocks leading the way at present, we'd have to count this as one for the bears going forward. We can see, however, that at holding periods of up to two weeks, the relative performance of Speculative issues and Non-Speculative issues seems to make quite a difference.