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February 07, 2006
Birinyi's short-term signal says buy
I discovered recently that Laszlo Birinyi's firm has its own blog, called Ticker Sense. Makes sense, since Birinyi, a pioneer of using quantitative and statistical techniques to predict the stock market, became famous in part for looking at trading volume in stocks tick to tick. Under his system, volume in a stock is measured on trades that are higher than the previous price (on an up-tick) and compared to volume made on a lower price (the down tick). The net picture is said to uncover whether a stock is seeing more selling or buying interest. So what is the firm divulging on its blog?
First, I like that many entries entries both refer to history and tweak those who misuse it. In an entry last week, the blog takes on the notion that the current bull market is nearing an end based on the average length of bull markets. Back in January 1995, the bull was looking on average pretty old, too, notes the firm over a chart of the S&P 500's subsequent rise, including gains of 34% in 1995 and 20% in 1996. But it was just getting started. They've also taken on the hoary chestnut that big cap stocks are about to stage a come back. Big cap stocks like GE and Citicorp don't lool appealing by Birinyi's technical measures.
But what caught my eye today was a more timely and, perhaps, more practical entry that signals stocks may be about to start another short-term leg up. Birinyi measures how many stocks are overbought or oversold by comparing the current price to the standard deviation of the 50-day moving average. It's a formula with a decent track record. At the close on February 3, oversold stocks outnumbered overbought stocks for the first time since October 28 last year. You remember October 28, right? Stocks ran up 6% over the next month. A similar signal last may predated the summer rally. The rally hasn't started yet, from the looks of today's actions, however.
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