In Todays Markets, Half of What You See on the Screen Isn't Real

Jay's Market outlook for 14th October, 2006 : European markets were mixed on Friday, while US stocks finished with small gains. Asian markets are mixed this morning with the Nikkei having made good gains, and the Hang Seng down marginally. The global short-term trend is mixed. We can expect two-way moves today with an upward bias




Half of What You See on the Screen Isn't Real

Suppose you see the S&P 500 Index (ES) futures rise a full point in a short period of time on solid volume. Seeing the market rally, you jump aboard, only to have the entire move retrace.

What happened?

In a nutshell, that move you saw on the screen wasn't real.

Yes, the index rose on buying, but what you didn't see on the screen was that the very same buyers of the index were selling the S&P 500 Index ETF (SPY). Once the futures moved a full point higher, exceeding fair value, they then sold the futures against a basket of stocks in the index to bring the futures and cash back into line. The moves were real, in the sense that they genuinely cost traders money. They're not real, in the sense that buying or selling did not reveal bullish or bearish tendencies on the parts of large market participants.

According to H. L. Camp, about 45% of all NYSE volume is now attributable to program trading. What that means is that the buying or selling you see on the screen may or may not reflect genuine demand or supply in the marketplace. Most readers are familiar with the NYSE TICK, a measure of how many New York stocks are trading on upticks (at their offer price) vs. downticks (at their bid price). Let's say that, instead of measuring the number of NYSE stocks trading at their offer prices vs. those trading at their bids, we simply focus on the Dow 30 Industrial stocks and investigate how many of them are trading bid vs. offer. The resulting statistic is called TIKI and, it too, can be viewed as a sentiment measure. When Dow buyers are aggressive, they will be willing to transact at the stocks' offer prices, and you'll see TIKI values skyrocket above +20. When Dow sellers are aggressive, they're willing to bail out at the stocks' bid prices and TIKI will plunge below -20.

We last saw very high TIKI/price change correlations on September 21 and 22, when the values were about .88. The recent price strength in the equity markets have followed from that. We are now at relatively average levels of correlation (.60). Much of May and June--a period of correction--featured very low correlations.

The moral of the story is that markets today are different than they were a decade or two ago. You can't necessarily trust what is on your screen or what your price-based indicators are telling you. Who is in the markets ultimately impacts what markets do.

This Article is written by : 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).