Will the Selling Continue? Short-Term Sentiment Can Tell You

For the past several days on my free research website I've been examining the role of breadth and momentum in the continuation and reversal of market rises and declines. It turns out that both rises and declines are more likely to spill over into upcoming sessions when a large number of stocks display upward or downside momentum. Perhaps, I thought, this spillover occurs because broad and steep declines produce short-term extremes in sentiment that impact the following days' trade.

As a way of testing this, I looked to a direct measure of sentiment: the NYSE TICK. The TICK is displayed by most real-time quote vendors as $TICK, and it measures the number of NYSE issues trading on upticks vs. the number trading on downticks. This is sometimes described by technicians as an overbought/oversold index, but that is misleading. It is better to think of the TICK as a sentiment measure, because it is assessing the willingness of market participants to facilitate trade either at the offer price (meaning that buyers are willing to pay up to own the stock) or at the bid (suggesting that sellers will give up the edge to get out of the market). By tracking where the TICK is trading relative to its mean value (what I call the Adjusted TICK, displayed daily on my site), you have a nice measure of whether bulls or bears are more aggressive in the marketplace. This correlates very well the market trend at the time.

The question, however, is whether the Adjusted TICK affects market results going forward. When traders are hitting bids (bears are aggressive), does this spill over to the next day's trade?

Thursday's market offers us a relevant opportunity for exploring this question. The S&P 500 Index (SPY) declined by over 1% on a very weak Adjusted TICK reading of -727. Since July, 2003 (N = 648 trading days), we've had 56 days in which SPY has declined by more than 1%. The following day, the market has been up by an average .09% (33 up, 23 down), stronger than the average one-day gain of .04% (326 up, 266 down) for the remainder of the sample.

If we break down the 1% declining days by their Adjusted TICK values, however, a pattern emerges. A median split (dividing the sample in half based on the Adjusted TICK value) shows that when the market declines 1% or more and the Adjusted TICK is very weak (less than -650), the next day's average change is -.07% (15 up, 13 down). When the market declines 1% or more and the Adjusted TICK is stronger, the next day's average change is .25% (18 up, 10 down). This supports the notion that market weakness tends to spill over the next day when sentiment becomes highly bearish--as was the case Thursday. When the market declines over 1% but sentiment is not gloomy, the next day is more likely to show a bounce. In fact, when the Adjusted TICK was greater than -450 on those down days, the market was up the next day 14 out of 17 times.

Where can inquiring minds obtain the NYSE TICK? Most real-time vendors carry historical data on their servers for downloading. A larger database is available from Tick Data. TICK measures specific to the S&P 500, including historical data, are available as part of the NeoTicker trading platform. My research has found it to be one of the best short-term measures of trader sentiment available.

Brett N. Steenbarger, Ph.D. is Associate Clinical Professor of Psychiatry and Behavioral Sciences at SUNY Upstate Medical University in Syracuse, NY and author of The Psychology of Trading (Wiley, 2003). As Director of Trader Development for Kingstree Trading, LLC in Chicago, he has mentored numerous professional traders and coordinated a training program for traders. An active trader of the stock indexes, Brett utilizes statistically-based pattern recognition for intraday trading. Brett does not offer commercial services to traders, but maintains an archive of articles and a trading blog at www.brettsteenbarger.com and a blog of market analytics at www.traderfeed.blogspot.com. He is currently writing a book on the topics of trader development and the enhancement of trader performance.