Monday, October 22, 2007

Extreme Bearish Sentiment and Other Ideas to Start the Week

* Extreme Bearish Sentiment - The NYSE TICK captures intraday sentiment, assessing at each minute the number of stocks trading at their offer price minus those trading at their bids. My Adjusted Cumulative TICK compares the current 1 minute TICK readings with the average 1 minute reading over the last 20 trading sessions and then adds these readings to arrive at a single daily total. When the total is below zero, we have more selling sentiment than the 20-day average; when the total is above zero, we have more buying sentiment than the 20-day average. On Friday, we had a five-day average Adjusted TICK of less than -400. That's only happened on 53 other occasions since 2004 (N = 952 trading days). Five days after the extreme selling sentiment, the S&P 500 Index was down by an average of -.17% (26 up, 27 down). That's notably weaker than the average five-day gain of .19% for the remainder of the sample. Our earlier post noted a bullish edge after five down days, but when the bearish sentiment is extreme, we don't see this bullish edge.

* Time Frame Selection - Trader Mike updates his links with interesting posts on selecting a time frame for trading and recession talk from CAT.

* Trading Education - Chris Perruna with some excellent links re: managing your money and stock market education.

* Market Summaries - The Shark Report tracks market internals and big winners/losers on the day.

* Market Fear - VIX and More tracks the fearfulness of Friday's market.

* Where Are The Earnings? - Bespoke Investment Group tracks earnings by market sector--interesting patterns.

* Frontier Market - Random Roger takes a look at Kazakhstan and sees something interesting.


Blain Reinkensmeyer said...

Thanks for the link in Brett!

Johan said...

"Our earlier post noted a bullish edge after five down days, but when the bearish sentiment is extreme, we don't see this bullish edge."

From a logical/statistical point of view I wouldn't say that this pattern makes the previous study invalid. In that case you might as well say that the previous study you are referring to makes this study invalid. But they are both valid, just pointing in different direction.

Jeff said...

Dr. Brett,
The link you posted re: Time Frame Selection is indeed interesting. There is a link there to a post by Teresa Lo, where she quotes William Eckhardt as saying [please feel free to edit/shorten if like]:

“One common adage on this subject that is completely wrongheaded is: You can’t go broke taking profits. That’s precisely how many traders do go broke. While amateurs go broke by taking large losses, professionals go broke by taking small profits. The problem in a nutshell is that human nature does not operate to maximize gain but rather to maximize the chance of a gain. The desire to maximize the number of winning trades (or minimize the number of losing trades) works against the trader. The success rate of trades is the least important performance statistic and may even be inversely related to performance. …
What really matters is the long-run distributions of outcomes from your trading techniques, systems, and procedures. But, psychologically, what seems of paramount importance is whether the positions that you have right now are going to work. Current positions seem to be crucial beyond any statistical justification. It’s quite tempting to bend your rules to make your current trades work, assuming that the favorability of your long-term statistics will take care of future profitability. Two of the cardinal sins of trading - giving losses too much rope and taking profits prematurely - are both attempts to make current positions more likely to succeed, to the severe detriment of long-term performance. […]If you make a bad trade and you have money management, you are really not in much trouble. However, if you miss a good trade, there is nowhere to turn. If you miss good trades with any regularity, you’re finished.”

I was wondering what your opinion would be regarding that, as a psychologist and a trader?

Brett Steenbarger, Ph.D. said...

Hi Johan,

Yes, the different studies look at different time frames. Also, it's important to note that the absence of a bullish edge does not necessarily imply the presence of a bearish edge. Thanks for the clarification.


Brett Steenbarger, Ph.D. said...

Great comment, Jeff; it inspired my subsequent post. Thanks!