Milking a Pattern: NYSE TICK and the Midcaps

Yesterday we looked at how strength and weakness in the NYSE Adjusted TICK were associated with superior and inferior returns 3 and 1 day out in SPY. This made sense because the TICK is capturing short-term market sentiment: the willingness of buyers to lift offers vs. the aggressiveness of sellers in hitting bids. Strong sentiment, when fueling a rising or falling market, does not turn around on a dime: normally buyers will only become bearish after prices retreat and vice versa. What we saw in the SPY data was evidence of price persistence: extremes of sentiment lead to higher prices over 3 days and lower prices over the next day.

Because the NYSE TICK is derived from all NYSE stocks and is unweighted, it should reflect sentiment among small and midcaps just as well as among the large caps. That's exactly what we see with the Midcaps: daily price change in MDY correlates .78 with the Adjusted TICK. However, because--as we saw recently--the Midcaps have been a better trading market (better trending, more volatility), the prospect is there to milk the sentiment pattern even more with MDY than with SPY.

I reran yesterday's analyses using MDY instead of SPY. The same basic pattern emerged:

• After a strong Adjusted TICK day, the next three day gain in MDY was .56%, much higher than the average change of .20% for the entire sample.
• After a weak Adjusted TICK day, the next day change in MDY was -.20%, much weaker than the +.07% for the entire sample.

The interesting thing is that the patterns were present with MDY, but to a greater degree. The average's higher volatility allowed traders to milk this pattern. This suggests that it is not only important to identify market patterns, but also the trading instruments most likely to benefit from the patterns.