Tuesday, February 21, 2006

SOX and Stocks: An Update

Much of my recent research posted here and on the Trading Markets site has dealt with lead-lag relationships in the market: identifying sectors that lead the major market indexes. One of my earliest investigations in this area was in an article I called "The SOX and the Stocks", in which I found that semiconductor stocks led the S&P 500 index.

I noticed today that, on a five-day basis, the S&P (SPY) is up by more than 1.6% but the semiconductor issues (SMH) is down by 1.35% over that same period. I decided to update my study by seeing what happens when these averages travel in different directions.

Since March, 2003 (N = 740), we have had 243 days in which SPY has been up more than 1% on a five-day basis. Five days later, SPY has averaged a gain of .17% (139 up, 104 down), considerably worse than the average gain of .30% (431 up, 309 down) for the sample overall.

When SPY has been up by more than 1% and SMH has been down more than 1% (N = 18), the next five days in SPY have averaged a loss of -.20% (9 up, 9 down). When SMH has been up more than 1% while SPY has also been up, the next have days in SPY have averaged a gain of .25% (109 up, 74 down).

It thus appears that strength in SPY is less likely to continue if it is not matched by strength in SMH--a factor we have to count as mildly bearish going forward.

Interestingly, I have found this relationship to hold on an intraday basis as well: It was the failure of SMH to break its previous day's highs early today that first alerted me to the possibility of a selloff.

2 comments:

Anonymous said...

Brett,

Thanks, again. I'm especially interested in finding out the software you use, if any, for the lead-lag analysis and whether you've developed any automated trading programs. I'll be happy to share with you my knowlege on these subjects. Skipper

Brett Steenbarger, Ph.D. said...

Hi Skipper,

All my analyses for the blog are conducted with archived historical data (vendors are listed on the Trader Development links page on my personal site: www.brettsteenbarger.com) and analyzed with the database and math functions within Excel. I have experience with automated trading programs, but do not use these in my own trading and do not develop them myself. Thanks--

Brett