This research shows why the market seems to go nowhere

I've been at this game for a while. My first trade was placed late in 1977, and I've traded in some shape, manner, and form every year since then. I recall the gold boom and bust in the early eighties; the double digit interest rates; and the liftoff for the great bull market in stocks in 1982. I remember panicked faces at the office coffee pot in October, 1987, as the market plunged and retirement accounts were down more than a third in the bat of an eye. The dramatic rise and fall of the Japanese market, record low volatility, Asian crisis, tech stock boom and bust, the meltdown of interest rates amidst deflation fears--I've seen a fair amount in my trading career. But I'm not sure I've ever encountered so much frustration among traders.

It's the active, intraday traders who seem most distressed. Judging from my email inbox and the traders I know personally, 2006--for all its auspicious January start--has not been a kind year so far. Even traders who have been quite successful in years past seem to be frustrated. The market, from their perspective, seems to be going nowhere--even though they can see that it has managed to stay near bull market highs.

I decided to do a little statistical investigation to explore the traders' angst. I went back to March, 2003--the start of the bull move--and looked at how the S&P 500 (SPY | Quote | Chart | News | PowerRating) has moved overnight (between the prior day's close and the current day's open) and how it has moved during the day session (from open to close). Here's what I found:

• From 2004-2006, the average price change from close to open (overnight change) has been .035%, compared with .039% in 2003. The standard deviation of overnight price change from 2004-2006 has been .29%, compared with .51% in 2003. The market has thus retained a positive bias overnight--no doubt thanks to strength in Europe and Asia--but the average size of the overnight move has decreased significantly.
   
• From 2004-2006, the average price change from open to close (day session change) has been -.005%, compared with .092% in 2003. The standard deviation of day session price change from 2004-2006 has been .40%, compared with .72% in 2003. Thus, day traders during the majority of the bull market--the last 2+ years--have seen no directional bias to the market. They have also seen far less total market movement compared with 2003.

In short, there *has* been no bull market for day traders in the S&P 500 market. Whatever movement there has been in the index is fully attributable to overnight action. The day market has been flat, and the average range has declined from 1.40% in 2003 to .95% from 2004-2006. Indeed, the average range has declined every year from 2003-2006, standing now at .82%.

Recently, on my research blog, I investigated trading patterns involving movements in the first hour of the day, the midday hours, and the last hour of the day. While I found a few patterns worthy of note, my eventual conclusion was that the statistical edges in intraday patterns were far less promising than the ones I had obtained over swing timeframes of 3-5 days. I notice, too, that the TradingMarkets PowerRatings exploit edges over a five-day period. I don't think that's accidental. Having run literally hundreds of historical analyses, I have yet to find a recent intraday pattern that provides an edge comparable to the swing timeframe patterns I'm noticing.

All of this puts the traders' frustration in perspective. Volume in ETFs and emini stock index futures has hit record levels during this bull market and yet price movement has progressively dampened. With more money chasing less opportunity, many market participants are left without a seat in the musical chair game of intraday trading. The most frustrated traders, I find, are those that are ramping up their size and their trading frequency in a frantic effort to extract whatever movement there is. If trading is a business, however, perhaps the better strategy is to do what good business people do when their markets become saturated: change course and pursue opportunity. That's how IBM remade itself into a services company; how Apple went from computer niche to digital music frontrunner.

There *is* opportunity in the marketplace.

It just isn't where most people are looking.

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.