Tuesday, February 5, 2008

These Are Some Big Arms!

There was some serious selling pressure today. Selling swamped buying on both the NYSE and the NASDAQ. The Dow, S&P 500 and Nasdaq all finished down close to 3%. Volume rose across the board.

The Arms Index for both the NYSE and the NASDAQ was very big. (Although as you can plainly see from the picture on the right, my arms are bigger.) The NASDAQ Arms Index closed over 3 and the NYSE Arms Index closed at about 2.7. Many people view large spikes in the Arms Index as a contrary indicator. It reflects panic selling on the part of market participants. This panic is viewed as a short-term oversold condition that leads to a reflexive bounce.

I ran some tests to measure today’s action against history. All tests were run back to 1/1/92. I found that a 1-day spike in the Arms Index of either the NYSE or Nasdaq without confirmation from the other showed very little edge.

A Nasdaq Arms Index greater than 3 has occurred 79 times since 1992. The next day the Nasdaq finished higher 57% of the time. The average winning trade was 1.7% but the average losing trade was 1.9%. The total expected value was a scant 0.2% rise the next day in the Nasdaq.

The NYSE Arms Index has posted readings over 2.5 fifty-seven times. The next day the S&P 500 rose 63% of the time. The average winning trade was 1.2% and the average loser 0.8%. On average the S&P gained just over 0.4% the following day.

Neither of these stats really gets me juiced about jumping in front of this train. (Did you see the photo of me looking juiced?) When I look at the events on a combined basis, though, results improve dramatically. Since 1992, there have been 13 days where the Nasdaq Arms finished over 3 and the NYSE Arms finished over 2.5. The S&P 500 rose 11 of the 13 times the following day. The average gain in the S&P 500 was 1.6% and the average loss was 0.15%. The average trade the next day was good for 1.3% and the mean was 1.2%.

After one or two days the results fell more in line with random. Any edge here appears to be very short-term.

Looking out a bit longer, the recent bottom is now looking very much in question. The positive feelings the bounce brought about were nearly all washed away yesterday and today. As I’ve been pointing out, the action immediately after a Follow Through Day is normally telling. So far it doesn’t look good.

Lastly – some house cleaning. Tradestation apparently did a data update on their advance/decline data last night. The Appel Daily Breadth signal I’d mentioned a few nights ago is now no longer appearing. As you might imagine, this aggravates me to no end. I doubled checked using other databases and found a signal should not have been generated. (It came very close.) I’ve imported advance/decline and volume data from one of my other data sources and will be using that from now on. Tonight’s tests were run using QP3 data imported to Tradestation (and confirmed with a 3rd database). I apologize for the false information generated by bad data and have already taken steps to minimize the chance of it happening again.


aqua said...

Really appreciate your posts! thanks.

Regarding TS data, realize that they "create" their own A/D data, U/D volume etc. I recently griped about this in the forums, because I didn't realize it and wondered why it differed so much from other sources. Fwiw.

Rob Hanna said...

Thanks Aqua. In the past the fact that the ratios came out nearly the same satisfied me. My frustrations this week lead me to think that I'm better off using outside data. I hadn't realized they "created" it based on their own data.


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