Wednesday, February 22, 2006

SOX and Stocks - Real Time

It's about 9 AM Chicago time as I'm writing this. The QQQQ opened higher this AM, but SMH was down on the open and some size was hitting bids in the semis. I know that there is a lead-lag relationship currently operative between "SOX and Stocks" so that alerted me to fade the opening strength rather than go with it. That trade idea paid out almost immediately in the first half hour.

Here's a further analysis: I looked back to March, 2003 and found 93 occasions in which the difference between SMH opened .5% or more weaker than QQQQ. From that open to the next day's close, the average price change in QQQQ was -.17% (38 up, 55 down), weaker than the average gain of .08% (380 up, 368 down) for the sample overall. Once again, we see SMH leading a relationship with a major stock average.

Applying these relationships to the proper time frames of trading is a big part of using them successfully. And, of course, one must keep in mind multiple lead-lag relationships, not just one involving a single trading instrument. When we see multiple leading relationships pointing the same way, that's when you can have real confidence in a trade idea.

4 comments:

Dave Johnson said...

Bret:
I find your work so thoughtfully constucted that I saw the pieces for this trade fall into place. Very nice. Thanks for sharing your tremendous knowledge and resources.

Brett Steenbarger, Ph.D. said...

Thank you for your kind comment, Dave. It's now a little after 10 am CT as I write, and the relationship that's key involves the small and mid cap issues. We'll be coming back toward the day's average price if those can't get some traction here.

Brett

Anonymous said...

Thanks to both of you. I, too, have a great deal of interest in lead-lag analysis and the stock/options/futures markets. The argument against lead-lag buffs is that the markets are so efficient today that no meaningful relationships will be found. I disagree. Please share with me any information you have on these ideas. Thanks again. Skipper

Brett Steenbarger, Ph.D. said...

Thanks, Skipper. I try to update relationships in the markets daily on this blog, but also on my personal site: www.brettsteenbarger.com. Increasingly, I'm looking at intermarket relationships, as well as relationships between equity sectors and within single indices. I appreciate the interest--

Brett