Mike Santoli mentions two interesting technical measures in his streetwise column in Barron’s this morning: Triple digit stock momentum at tops, and the downward momentum of low priced S&P500 stocks at lows.

Santoli:

“LAST YEAR, WITH THE MARKET near what would prove its ultimate high, I noted a perverse pattern in which triple-digit- priced stocks were consistently outperforming other issues, a sign of momentum-chasing speculation (Streetwise, May 14, 2007).

We’ve come nearly full circle, as single-digit midgets abound and stocks are pounded harder once they lose a digit before the decimal place. Ned Davis Research tracks the price of the 25th-lowest-priced stock in the S&P, which tends to mark a low as bear markets culminate, as a marker of speculative juices having been wrung out of investors. It’s now around $6, near levels of the 2002 bottom, though not yet the 1974 low — near when Barron’s ran a story pointing to the abundance of sub-$2 stocks that were effectively warrants on the survival of American capitalism.”

If I understand this correctly, when $100+ stocks are out performing the markets, one needs to be somewhat cautious, as this is a dangerous warning sign? And when S&P500 stocks break below $10, and then underperform the broader index, this can mark a bottom?

Hmmm . . .

Both of these metrics makes some intuitive sense; Has anyone back-tested either of these? Can you show some (or point to) data that verifies any of this?

>

Source:
Welcome to the Mind-Numbing Market
MICHAEL SANTOLI
Barron’s NOVEMBER 15, 2008
STREETWISE

http://online.barrons.com/article/SB122670741435729951.html

Category: Contrary Indicators, Markets, Technical Analysis, Trading

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

39 Responses to “Momentum Top & Bottom Signals”

  1. mark mchugh says:

    Doesn’t a $6 stock have to lose 66% to become a $2 stock?

  2. Bruce in Tn says:

    Careful with the words “intuitive sense”…. [BR: Hence, the request for hard data verification!]

    As we saw last night in the Schiff video, all the folks making fun of Schiff while on television intuitively thought the market would go up. Ben Stein was unmasked, and Schiff now has the last laugh.

    My wife and I have been drinking coffee and looking through the economic news this morning. There are now over 30 countries officially in recession, the bailout is still being done in a very shifting, piecemeal sort of way, consumers are saving which will be good long term, but probably awful for the Christmas season, and leading indicators are still very troubled with the Baltic Dry Index still about 820 and some recent increases in LIBOR.

    Intuitively, this seems unlike ya daddy’s recession. I know when the tech bubble burst, I had no doubt the sun would come up tomorrow…we are still in the woods, and the birds have eaten all the bread crumbs…

  3. Byno says:

    Good morning Barry,

    I don’t have time to get into much this AM, but this intrigued me as well so I did a little sleuthing. Here are three charts representing six month, one, two and three year time frames for stocks >$80 on the S&P 500 (I used $80 instead of $100 under the premise that some stocks that were above $100 have gone below $100. Yes it’s arbitrary, but no more so than using $70, $60 or $50).

    Three Years

    Two Years

    One Year

    Six Month

    Notice that the S&P 500 as an index goes from 9/11 in the three year time frame progressively upward to 4/11 in the six month time frame.

    I think using ‘stocks > $100′ is relatively arbitrary considering that the author is comparing the 70′s with today, so it might be more prudent to use a metric such as price/market cap to cancel out the noise from inflation and make it less gimmicky. But, certainly something I’ll spend more time on (another day).

    One last note: this is one of the biggest reasons why I come to this site. I don’t expect to always agree on everything, but I love getting trading ideas like this, and given your background Barry it would be nice if we did more experiments ala the scientific method where a hypothesis is given and we go out and research the hell out of it. Thanks.

    Byno

  4. Gene says:

    I wonder if the form of capitulation will be different this time around?

    Will it be in terms of equity sales or will it be in terms of people? If the scenario becomes one of kids not wanting to be stock salesmen or saleswomen will that be the true capitulation? Will it be capitulation if a sizable portion of the “gray hairs” abandon their trade? While people are still buying software and believing they can be day traders or make tons of money on their own, I don’t think capitulation will have occurred. Why? I think it indicates there is still hope. I keep harping back to the old saying: “The market can stay irrational longer than you can stay solvent.”

    Just thinking out loud over coffee this morning.

  5. Bruce in Tn says:

    Another thought before I leave this morning…for people such as I who are primarily investors, and not sophisticated traders like Barry (Barry will land on his feet no matter what the market)…there is something else that bothers me that I keep coming back to over and over when considering where all this is heading..

    Let’s look at the Big 3…no not them. USA…in recession..expected to drop GDP by at least 3% this quarter, some think 4-5…Japan…in recession…Nikkei and Dow now neck and neck…both USA and Japan interest rates can be cut no further….Germany…officially in recession as of this week. And this is the beginning, at least as far as we know, of the downturn…

    Other players?

    England…deep in the reeds…China, nope, news there seems worse every week…they will have their hands full over the next year. Russia…hopeless.

    Gulf states…?….in a tizzy with markets and real estate prices dropping like a stone.

    Latin America? Er….no.

    Could all this change…Certainly…almost by definition the term “life” means change…rocks don’t..we do.

    But my point before I go watch some mindless college football, is that the things we can monitor all seem to be pointing down for the forseeable future…

    World was massively overleveraged…will take time to get back…Kudlow’s mustard seeds won’t start growing until winter is over.. and probably it Is Just Mid-November..

  6. Byno says:

    1: I can’t count

    2: Those charts didn’t load the way they were when I originally looked at them.

    I Fail

    OTOH, maybe some time this weekend I can Flickr some charts to actually illustrate a point. We’ll see.

  7. tranchefoot says:

    Can someone please explain to me why they believe TA is still meaningful (assuming it ever was) now that so much volume is traded off-exchange in the “dark pools”?

    Thx

  8. jmborchers says:

    I think this is close to right although I don’t know how yet to access previous data (from like the 70′s 80′s) we have charts but what I want to see is book value

    For example the stock I’ve been buying heavily is GLW trading at $9 book value is $8.68.

    When you can get techonology for book value something is wrong with pricing or the system will explode. If the system explodes US$ I think it worthless anyway. So might as well load up on risk.

    Remember what we know from all along. The system rewards people who take irresponsible risk.

  9. Byno: One last note: this is one of the biggest reasons why I come to this site. I don’t expect to always agree on everything, but I love getting trading ideas like this, and given your background Barry it would be nice if we did more experiments ala the scientific method where a hypothesis is given and we go out and research the hell out of it. Thanks.

    ~~~

    I’ve been thinking of doing more of that — the weekend really lends itself to deeper data sifting . . .

  10. DavidB says:

    Was this a quant coup:

    I have had this theory chasing around in my head. Has anybody thought of it?

    The hedge and banking fund quants have looked at this distorted financial picture and decided it has been too unfair to too many people. What they did was they did the math and figured out exactly what it would take to trigger a bloodless financial coup. Not only would they send the system pyramiding up in a way that caused all the big money to greedily pile in but then they figured a way to boomerang the system in such a way that it would crack backwards so hard on the fractional reserve banking system that the thing would be hopelessly broken beyond repair and we would have to start over with the economic infrastructure fundamentally intact. The dot com boom was a trial run and the guys in the corner office were not made aware of the plan lest they sabotage the effort. How many math guys in the right places and being in on the conspiracy would it take?

  11. KC says:

    I can’t say I know a great deal about how shares are priced, especially over the long-term, but it would appear that a $2 a share stock in 1974, adjusted for inflation is equal to $5 a share in 2008. Or do stock prices not adjust for inflation at their “cheapest” levels? Also, I always thought stock prices were a factor of how large the company is vs. how many shares are available, and the demand for those shares. So a small company like Crocks had shares valued at about $50 earlier this year. At the same time, Walmart shares were valued at $60 a share. We can’t say that walmart shares were more expensive, because the company had significantly more shares outstanding than crocks did. If walmart bought back 99% of its shares, the demand for the remaining shares would increase, and the stock would very likely increase in price. Once again, I’m not sure if it is more complicated than that, but it seems comparing $100+ stock prices to $2 stock prices is like comparing apples and oranges. I don’t think it is the triple digit numbers that convince people to jump on board and buy the stock, I think it’s simply the momentum. But a triple digit stock price doesn’t necessarily mean it has momentum. Or does it? Couldn’t walmart split its stocks a couple times to decrease their value to $2 a share, and then claim they’re one of the cheapest stocks on the market?

  12. leftback says:

    I’m looking forward to seeing some more analysis of Santoli’s idea, and also more discussion of stocks trading below book, which is getting to be more and more every day. There is no doubt that you could really feel the unreality in July 2007 most obviously in GOOG, AAPL and GS as P/E ratios became an apparently irrelevant metric and analyst estimates raced to the sky.

    David B: A lot of quants are not as smart as you think. Some of them have trouble figuring out how to get into a boiled egg. No, this was just good old-fashioned greed and incompetence.

    Bruce: that late selling cost me another burger.

  13. jmborchers says:

    Okay, I found a book value chart.

    http://www.pzena.com/investment-analysis-1q08

    Figure 4.

    I would argue that many companies in the S&P500 during the internet bubble had no actual book value (thus the bankruptcies) and that’s why this chart will be lower than we will get this time. But that’s my opinion.

  14. jmborchers says:

    Leftback you are right about estimates racing. The stock movement was similar to the bubble of 2000 except this time to combat the 100 P/E ratios (which is some cases happened anyway) anaylst just raised future estimates.

  15. DavidB says:

    @ leftback :(

    That’s too bad. I was hoping that someone knew what they were doing…..at least someone that doesn’t want to push us all into a new set global financial ankle bracelets with chains and matching balls. Being a dreamer, I had to throw the Hail Mary. (;

    I guess the fallback position is always God. Rumor has it He may be having trouble figuring this all out too…..but I doubt it. The question is, does He care……or is He too busy still picking up the pieces over in Africa? THAT is the big question.

  16. wally says:

    Doesn’t this seem like rather tendentious logic? I mean, prices are high near highs and low near lows, after all.

  17. jmborchers says:

    DOW log historical average. Well we broke below average.

    http://s265.photobucket.com/albums/ii204/jmborchers/?action=view&current=DOWAvg.jpg

  18. DP says:

    Wouldn’t it be nice, just for once, to have the press present the same news a little differently:

    “Newsflash: 150,000,000 people still have jobs! This number is down 510,000 from last month.”

    Or how about:

    “Newsflash: In spite of borderline financial collapse, stories of a great depression, GM about to go under and massive 401k losses, consumers last month still spent 96% of what they spent last year. Even in highly discretionary stores such as Best Buy where everything they sell can be found online for less, customers still spent 90% of what they spent last year.”

    Same information. Same underlying data.

    People like to watch train wrecks. That’s what we get. We need GWB to go nail one of his interns so everyone has something more important to focus on.

  19. constantnormal says:

    leftback, Bruce — what IS the current balance of burgers? Or is this something that gentlemen can agree on?

  20. DP: The total number is background — its a given.

    The changes are what is significant.

  21. I-Man says:

    Cant say I’m as data inclined as some of you… but you said “intuitive” BR… and thats how I do approach most of this stuff. I do think some of the action in the cheapies is starting to go along with this guys thesis… and that pared with some of the other signals that I’ve been “sensing” with respect to us being at a nice tradable complex bottoming formation, and signs that selling pressure is beginning to lose IT’s momentum, I have been sifting through the rubble of late in precisely these beaten down stocks.

    I have to say that as someone who had alot of fun with the “$100″ and up stocks back in the bull momentum days of last year, when it finally dawned on me that they had juice, and I stopped trying to find the cheap stocks that were the next to run…

    That there are some really cheap stocks out there today, and it seems to have come full circle. Now, that said… they are cheap for a set of good reasons, but I cant help but feel that there are some good chances with good R/R that are out there in the cheap stock world.

    Take for an example… GM. There, I said it. GM. POS that it is. I’m not a CFA but I have an idea that there isnt any cash value at GM, as opposed to a GLW for example, and that the fundies are well, shitty. Staggering business, on the verge of bankruptcy, decrepid management that just wont let go, up to their eyeballs in obligations to the UAW… shit is grim. Stock closed the week at 3.03, off a 52 wk low of 2.85.

    Is there a trade in this POS???

    I think there is. There’s 18.10% of the float short right now with 4.3 days to cover. There’s some juice there.

    GM is basically a call option at this point on the Fed/Treas/TARP Monster… (or “Fedzilla” as Ron at http://thechartpatterntrader.blogspot.com/ has said dubbed it, which I think is awesome.)

    There’s two scenarios: bankruptcy or money from the TARP Monster… if the Feds do any sort of preferred equity or rights/warrants kind of deal, or any kind of deal alternative to bankruptcy then it could double in no time. Worst case, a market stop set at 2.75 that might not fill til a bit lower tightens the risk up.

    I dont know though, but it seems like a good way to trade this cheap stock idea, IF you believe they are going to catch a bid here. I also look at a stock like AKS, or CBI, or SGP, or TSO, or RIO… there’s tons of them out there. GM is just one I was scoping out this AM… still have to look at the short term charts, but at a quick glance there is some good signs on MACD for GM in particular.

    I assume some of you data folks could run a few of these and see what you come up with stat wise… I’d be interested to see your charts.

    Alright, time to go blow some leaves and stack some wood. Beautiful day out in the PNW along the mighty Columbia River. I-Man out.

  22. I-Man says:

    Sorry. Disclosure: I have no position in GM and really no balls to push my margin any further. -I-Man

  23. Will says:

    To get around questions related to inflation we looked at the price of the 25th cheapest stock in the S&P 500 (5th percentile). Since 1972, when the price of the 25th cheapest stock is below $6 the market has a GPA of 23%. When the price of the 25th cheapest stock is between $6 and $16 the market has gained 5%. Finally, the S&P 500 has gained 1% when the price of the 25th cheapest stock is above $16.

    The idea being that speculators typically buy cheap stocks. When the price of the 25th cheapest S&P 500 stock is below $6, it signals that speculators are fearful. When the price is above $16 it signals excessive speculation.

  24. larster says:

    I-Man

    My broker was giving me the short ratio, etc when GM was around 10. Seems a crowded dangerous trade to me. Good luck.

  25. constantnormal Says:

    November 15th, 2008 at 1:34 pm
    leftback, Bruce — what IS the current balance of burgers? Or is this something that gentlemen can agree on?

    cn,

    that’s funny. with so many FTDs between those two, I’m beginning to think that they’re too used to dealing with the DTCC.. : )

  26. Byno says:

    Alright, since I’ve had a moment to read the comments, it appears that there are actually three questions raised by Mr. Santoli’s article:

    1. When discussing triple-digit stocks outperforming other issues:

    a) Why does triple-digit price translate to ‘expensive.’ Wouldn’t a better metric be price to shares outstanding? For example, Autozone’s price is roughly equal to that of Chevron’s, yet Chevron’s market cap is nearly 25x that of Autozone’s. Which of the two is stronger? Which of the two is more ‘speculative;’

    b) ‘Outpeforms’ is a loaded term in this context. Outperforms over what time frame? One month varies very differently from one week or one year. Furthermore, by using a time period to measure outperformance we fall into the same trap as using other pseudo-indicators such as moving averages: yes, the 87 day SMA is the best indicator in the last twenty years (as a conjecture). Do you wanna bet an 87 day moving average will be the best indicator in the next twenty years?

    2. When discussing ‘cheap’ stocks:

    a) Hard as it is to believe, thirty-five years ain’t a lot of data. Let’s see what it looks like from, say, the 1920′s on;

    b) There absolutely has to – HAZTA – be a better metric for measuring ‘cheapness’ that stock prices. $6 is precise but not necessarily accurate (to bring up a topic from a few years ago). Why not use the market cap of some nth percentile, across a swath of percentiles to avoid cherry-picking, against total market cap? Thatsolves a lot of the arbitrariness of using specific prices.

    3. Does using this model work better than other models? In the comments above, Will suggests that when stocks are below $6 the subsequent return is 23%. Over what time frame? If we’re talking short term, that’s fantastic, but one could use an old saw such as PE ratios and come to the same conclusion, minus all the work needed to conduct this experiment. And, if we are talking short term returns, what kind of drawdowns will I experience waiting for the turn? How does making these trades compare against buy and hold when taxes and transaction fees are included?

    Just a rough patchwork of what’s running through my brain.

  27. Bruce in Tn says:

    I think Leftback still has me by a Whopper. He was gracious enough to offer three burgers after an especially bad week, but I think he is still marginally ahead.

    I plan to overtake him this week. And if he’d taken my initial claims of 510k this week, as I expected him to, we’d be even.

    I will make him an offer on the next bet he “can’t refuse”……

  28. Bruce in Tn says:

    Couple of other things, especially about when to look for the bottom.

    Most of you probably saw this today, but now the european economists have gotten on the train with Roubini and Schiff, and I did like this quote..

    “The third quarter looks like a walk in the park compared to what lies ahead,” said Thomas Mayer, chief European economist at Deutsche Bank in London. “This will be a deep recession.”

    http://www.bloomberg.com/apps/news?pid=20601100&sid=a5Ma4RJLgOAo&refer=germany

    Got to see if the old Ball Coach can make a game of it against Florida…certainly doesn’t look like it.

  29. Simon says:

    Well I’m not a big trader, understatement, but the only idea I have at the moment beyond owning gold mining stocks and perhaps a bit of bullion soon, is to short big names like APPLE, I thought about GOOGLE but then thought again since the net and their search engine is fast becoming a basic commodity.

    I do like the idea mentioned above it makes good sense at first read. Im looking forward to any follow up forth comming

  30. DP says:

    Where do you guys do backtesting? Is there a database of historical stock prices available that anyone can get at, or is this mostly proprietary? (Any site offering stock charts, for example, must already have this data).

    As a software developer who earlier this year got smacked in the face with a 2 by 4 labeled “Better start studying WHY your net worth is disappearing”, I’d love to run some tests.

  31. jakester says:

    too many analysts price the S&P as if this were some ordinary bear market with an assumed recovery period just over the horizon. This time around is not the ordinary and until these models are adjusted accordingly, those who decide to deploy capital based on historical precidence are just asking to get obliterated in the weeks ahead.

  32. arty says:

    It is time to sell if Barron is bullish

  33. DavidB says:

    @ DP Says: November 15th, 2008 at 12:49 pm

    Wouldn’t it be nice, just for once, to have the press present the same news a little differently:

    and

    @ Barry Ritholtz Says: November 15th, 2008 at 1:35 pm

    DP: The total number is background — its a given.

    I would like to agree with the argument but when murders in a city of 2 million go from 2 to 3 and the press reports that the murder rate is up 50% in screaming headlines I’ve got to think that the herd is being panicked in a specific direction in order to push an agenda. They also don’t get paid for reporting boredom. One thing I am wondering is how much all the panic screaming by the MSM has contributed to the shut down of discretionary spending this fall. It is quite interesting that once the screaming of the media started the spending stopped….and now that Obama is in office and the democrats control virtually everything I’ll bet the economy is going to get nicer again

  34. flenerman says:

    If I may play Devil’s Advocate with regard to your response to DP, Mr R—while change may be most important to those who live (or trade) at the edge, perhaps you’re too quick to dismiss one who sees the glass as 90 or 95% full.

    DavidB, you might have made a reasonable argument if you didn’t succumb to paranoia. Please, sir, what is the agenda? MSM? Give me a break. Yes, the press in all it’s forms has become more concentrated than I would like, but the NYT and WSJ, WaPo and WaT, Fox and CNBC all in the same bed? Or perhaps only three of those are considered members of the MSM?

    Mike

  35. DavidB says:

    flenerman,

    You are leaving out all of TV and many of the major internet news sources too like Yahoo and Google who have both been shown in studies to lean left in their selection of news and news feeds.

    For the ones you mentioned and the above I mentioned Obama is the ideal candidate. Just like his predecessor Bill Clinton was before him. If you are going to deny that they have all been crying havoc over the last few months leading up to the election then you haven’t been paying attention.

    The real test will be what will come next though. If the markets and the media suddenly calm down and the world gets rosy again it will sure be an odd coincidence going forward. Especially since people’s credit situations haven’t changed much. But that is where the fed and the banking system come in don’t they? If they suddenly start turning on the taps and lending to each other it will be and incredible coincidence of timing. That the US election is the pivot point in the financial crisis is just too cozy for me. Especially since the US is supposedly going in the direction that is anti market

  36. DavidB says:

    correction:

    You are leaving out the big 3 of TV and CNN etc. That is huge swath of viewership

  37. guru says:

    Ned Davis Research uses the abundance of low priced-stocks as a metric for marking the bottom. I see $’s in front of all those single-digit stocks and see them as opportunities to make large percentage gains through their “non-expiring call options” characteristic. To see how, check out stockchartist.blogspot.com