Patterns, Scatterbrains, and Another 27

What you focus on grows.
~Anon.



I'll spend all day turning over rocks just to see what's underneath. I don't make many friends with the ants, worms, and termites this way, but research comes at a price. Watching the Dow and Nasdaq diverge on Friday (Dow finished in negative numbers, while the Nasdaq finished with a gain), it got me wondering if there is anything predictive with this type of occurrence.

After crunching some numbers, it was discovered that this divergence happens about 16% of the time using recent five year history. Could this also indicate a rising or falling market over the next few weeks? Let's look at the scatter chart below...



The blue dots represents the correlation between the 10 day price change (horizontal axis) of the S&P and the difference of the closing prices (vertical axis) of the Dow and Nasdaq. The red dots represent the price divergence between the Dow and Nasdaq when one is positive and the other is negative with a difference of 1% or greater. In order to qualify as a red dot, either the Dow or the Nasdaq would have to close with a loss, and the other index would have to close with a gain. Friday's close is an example of this.

The average ten-day price change over six years for all days is about 3.6% versus an average of 6.2% for the ten-days after all 1% price divergences between the Dow and Nasdaq. It's about 5.3% if the 2nd half of 2008 is thrown out. Not surprisingly, the majority of red dots representing a ten-day increase for the S&P occurred when the market was riding above the 50-day moving average. Even with that, based on the paint splatter distribution of blue and red dots, I don't see any real correlation between price divergence and significant price increases or decreases of the S&P over the next ten days. I expected to see a taller, thinner vertical column of blue dots and a wide distribution of red dots. The results in the scattergram look rather random unless I'm missing something.

Looks like this scattergram turned out to be a scatterbrain scattergram. Can't fault a monkey for trying. Some rocks got nothin' but dirt under 'em.

As far as patterns go, maybe I can interest you in the 27 Club. Looks like we have to add another talent to the list.

I know, Amy died a few years ago. She just finally made it official yesterday.