Measuring sentiment in real-time

Readers of my columns and website know that the NYSE TICK is one of my favorite market measures. Why? It is a moment-by-moment polling of sentiment in the marketplace. When the TICK is strong, more transactions are occurring at stocks' offer prices, which means that buyers are aggressive--not waiting for prices to go bid before entering the market. When the TICK is weak, sellers are the more aggressive party, hitting bids--not waiting for stocks to trade at their offer prices before bailing out. The beauty of the TICK is that it simultaneously polls traders across all NYSE stocks.

Unfortunately, this is also the weakness of the NYSE TICK. Lawrence Chan of NeoTicker explains that many of the NYSE issues don't trade for long periods of time, creating "stale" ticks. These dormant issues are given every bit as much weight in the TICK as those that are active. The other problem, of course, is that most of us are not trading the NYSE Composite Index. The NYSE TICK will soar to heights or plunge deeply if a buy or sell program hits the small stock universe. That may not be an accurate gauge of strength or weakness in the S&P 500 large caps, however.

One way of addressing these shortcomings is a TICK measure specific to the instrument you are trading. Below is a unique chart of the morning's first hour trading from Friday, 12/16/05. The pink line is a trade-by-trade price line of the S&P 500 (ES) futures. The blue line is the TICK1000, the sum of all upticks minus downticks in the ES futures for the past 1000 trades. Note that, although the market opened higher on Friday, we never saw significant net upticks in the first minutes of trade. From the open, just as many traders were hitting bids as lifting offers--an early and helpful clue to weakness. By the time the futures made their lows at 1280.50, we were already seeing a smaller proportion of trades occurring at the bid. This divergence nicely alerted us to the subsequent upthrust in the Spooz. Later divergences from the first hour of trade are also labeled.

I utilized a 1000 tick value for the indicator because it smoothed out very short-term noise yet still captured short-term swings in the market. In point of fact, any value of the indicator can be constructed to fit traders' time frames. Chan, in his article, describes the use of a TICK16 index, which sums the upticks and downticks for the last 16 trades. His NeoTicker program not only computes and graphs this for traders in real time, but can generate TICK indices for any grouping of stocks one chooses. Thus, it is possible to obtain a TICK index specific to the S&P 500 stocks or to semiconductor issues. (Please note: I hold no proprietary interest in TickQuest or any of its software. I initiated the contact with Chan because a reader had alerted me to its tools.)

There are very few ways of measuring market psychology on a moment-to-moment basis. TICK indicators over varying periods, specific to individual trading instruments, and constructed across baskets of instruments promise a granularity of analysis that is difficult to achieve with put-call ratios and other sentiment measures. Here and on my research website, I will be exploring applications of these measures.

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.