Sorry!! The article you are trying to read is not available now.
Thank you very much;
you're only a step away from
downloading your reports.

Minyan Mailbag: Context, Part Deux


Well, I'm not sure what to think now!


Editor's Note: Minyanville is a community of people who share an interest in fiscal literacy. As perspective is an important aspect of our daily routine, we share this email with hopes that it adds balance to your process.

I've received quite a few questions about the intraday reversal stat that I posted earlier, and my guess is others have similar questions, so here goes...

"In your last Mailbag, you said you expected more downside. How do you reconcile that with the bullish implications of your reversal study?" Minyan Pete

The reversal study is one input to my overall gauge of risk. With the current sentiment situation, as I see it the risk is greater to the downside than upside. I expect prices to decline further, but part of my reasoning is NOT because we had an intraday reversal yesterday.

"Would 2 reversals back-to-back make a difference?" Minyan JK

Not really. Since 2003, we've seen two consecutive reversals (one being at least 1%, the other .5% from previous close to that day's high) six times. Ten days later, the Dow was higher 4 of the 6 times, with a return of +1.6%. Over the past 80 years, the results were slightly positive going forward - still positive a majority of the time across all time frames, but overall a bit less than random.

"What if the market had just hit a new recent high, did that make it bearish?" Minyan Duke

There are an infinite number of inputs we could test to check for applicability to the current situation, and yours is one of them. Looking at recent activity, no it didn't make it bearish. Ten days later, the Dow was up 3 out of 4 times with a return of +2.9%. Long-term the results going forward were slightly more positive than random.

"Since stocks have tended to go up over time, i.e. have a drift factor in their dynamics, do you normalize your data when you say for example that 60% of the time the market was up 10 days later (in reference to one of your posts today)?" Minyan Bill

Yes, and no. Yes, I do account for that in many studies, but no I didn't for this particular one. It's important to take into account the larger market context when looking back more than a few years (particularly the 80 years that I cited) - your results could be good, but they may not have beaten a random return during the study period. I didn't normalize the results at all for the intraday reversals simply because I wanted to see if the market really did "almost always decline further" on an absolute basis.

"Do you really think what happened 80 years ago is applicable to today?" Minyan Steve

Good question, and it's one I always struggle with. We want to go back as far as possible to get as many occurrences as we can (a problem when just using recent history), but the further back we go, the more we have to accept the fact that market dynamics have changed. Program trading, the proliferation of quick-trigger hedge funds, decimalization, etc. all change the dynamics of today's market versus markets of 10, 20, 50 years ago. There's no right answer, we just have to acknowledge the weaknesses of what we're looking at and accept the uncertainties.

< Previous
  • 1
Next >
No positions in stocks mentioned.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.

Featured Videos