Monday, July 03, 2006

The NYSE TICK and Momentum Effects

The Adjusted NYSE TICK is a measure of the number of stocks trading at their bid vs. offer price at 10 second intervals through the day, with the raw values adjusted to create a zero mean. This statistic is summed to create a daily measure of buying and selling pressure and is reported each day on the Trading Psychology Weblog.

The Adjusted TICK captures interesting short-term momentum effects in the S&P 500 Index (SPY). Since July, 2003 (N = 741 trading days), when the five-day Adjusted TICK has exceeded 1500 (N = 71), the next five days in SPY have averaged a gain of .53% (49 up, 22 down). That is much stronger than the average five-day gain of .16% (414 up, 327 down) for the sample overall.

This suggests that strong buying interest tends to be followed by additional market strength in the short run.

When the five-day Adjusted TICK has been less than -1500 (N = 78), the next five days in SPY have averaged a gain of .54% (50 up, 28 down). Again, this is much stronger than the average five-day gain.

This indicates that strong selling pressure tends to reverse in the near term.

The bottom line is that, on a five-day basis, very strong, positive Adjusted TICK readings and very weak, negative readings have been associated with favorable returns. When the Adjusted TICK has been neither very strong nor weak (N = 592), the average five-day gain in SPY has been only .06% (315 up, 277 down), far weaker than when the Adjusted TICK is nearer its extremes. Of the indicators I've tested, the Adjusted TICK appears to be most sensitive to these momentum effects.

Interestingly, despite the big rise in the market on the heels of the Fed announcement, we are not at a level in the Adjusted TICK that is normally associated with short-term positive momentum effects.