Readers know that I look to the NYSE TICK as a measure of market sentiment. There are good short-term trading patterns that utilize the TICK; there are also longer-term patterns based upon shifts in the distribution of TICK readings. We see some short-term momentum effects in the market based upon extreme TICK readings over a five-day period. An earlier post, however, found subnormal two-day returns following individual big swinging TICK days in the market.
On Wednesday, we saw an example of a strong TICK day, with the Adjusted TICK closing at +903. We also showed very strong momentum among stocks, with my Demand measure (number of stocks closing above their short- and intermediate-term moving average envelopes) exceeding Supply (number of stocks closing below those envelopes) by more than 5:1.
Since 2004 (N = 687 trading days), we've had 32 days of very strong TICK (greater than +700) and very strong stock momentum (Demand:Supply better than 5:1). Two days later, SPY was down by an average of -.15% (14 up, 18 down). That is weaker than the average two-day gain in SPY of .06% (362 up, 325 down) for the entire sample. Interestingly, this underperformance has tended to reverse over the *following* two sessions.
The implication is that it is common for markets to take a pause after a big buying day. This tends, however, to be a short-term effect; returns are actually moderately superior four days out.