One Way Days: Are the rules different this time ?

That’s the intriguing question asked in a recent WSJ article, New Rules For Picking A Bottom?

Don’t leap to the wrong conclusion. The phrase "Its different this time," in its most expensive permutation, refers to rationales why an unsustainable trend will continue, despite obvious risks.   

The subject presently at hand is somewhat different: Why are usually reliable technical/quantitative signals failing to have much forecasting prescience?

One of the attractions of quantitative decision making is its attempt to bypass our inherent weaknesses.  The way Humans developed has led to a great deal of fallible interaction with capital markets. Error prone decision making is hard-wired into our wetware. (See You just ain’t built for it). We bring a lot of baggage to investing, courtesy of a few million years of evolution.

So it is always fascinating when decision making processes designed to bypass this weakness suddenly stops working. And we have seen several examples of this as of late:

90/90 Days: When 90% of volume is in the same direction, and 90% of price moves are also, you get a "One Way Day." These usually are very bullish signals.

"When stocks are approaching the
end of a decline, investors tend to be in a panic, and their sell
orders dominate trading. Then, once the selling runs its course,
bullish investors step in with heavy buy orders that dominate trading
and, in turn, signal the beginning of a rally.

Lately, that combination of heavy selling followed by heavy buying is exactly what the market has seen — on steroids.

"We have been
getting these days at the rate of one every 3½ days, and that’s just
crazy," says Paul Desmond, president of research service Lowry’s
Reports in North Palm Beach, Fla., who has done extensive research on
the subject. "We don’t have anything like that anywhere in our history"
of data, going back to 1933, he says."

Other independent research shops have had related problems. Ned Davis Research tracks a variation which they call nine-to-one days (trading volume only). The problem is that the huge uptick in
volatility has wreaked havoc with these signals. Because there were too many
nine-to-one days, Ned Davis simply raised their 9-to-one threshhold to 10-to-one days.

This isn’t the first time I’ve seen this: From 2001 thru 2003, the usually reliable Arms Index simply stopped being a good timing signal for buys. Dick Arms re-jiggered it, placing the basic index into an oscillating framework. Like Ned Davis’ approach, this eliminated the previously rare but suddenly all too common signals.  The weaker "false" signals were eliminated.

What is different this time is that 2 trillion dollars worth of fast money is in the hands of active hedge funds. Failing to adapt to that could be quite expensive for traders . . .


New Rules For Picking A Bottom?
WSJ, September 10, 2007; Page C1

Fear the Roller Coaster? Embrace It
WSJ, September 11, 2007; Page C1 (THE GAME)

Investors’ View Of Risk Returns To Normal
Justin Lahart
WSJ, September 10, 2007; Page C1 

You just ain’t built for it
Apprenticed Investor: Know Thyself
Barry Ritholtz, 5/3/2005 10:20 AM EDT

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What's been said:

Discussions found on the web:
  1. Winston Munn commented on Sep 12

    Anyone have thoughts on if the change in the “uptick rule” has contributed to the increased volatility?

  2. paul commented on Sep 12

    “uptick rule” Actually it appears – in this market anyway – the effect seems to be very little…if the bottom drops out – they will use it as part of the severity – but analysis should relate it to other big drops…However, as this article relates…”Are The Rules Different This Time?”

  3. PC commented on Sep 12

    Trying to predict markets with indicators is a fool’s game. Chuck Lebeau computer backtested every indicator under the sun and found none that can do better than a coin flip.

    I have followed and tried Lowry’s 90% up and down days, ARMS index, Mcllaran Oscillator, etc. etc. and none of them worked. In fact too many indicators led to analysis paralysis and led to trigger freeze.

    Finally I woke up and stopped trying to predict markets and follow price action instead. That’s when my trading started to become profitable.

    In your post, you quote Paul Desmond as follows:

    “Paul Desmond, president of research service Lowry’s Reports in North Palm Beach, Fla., who has done extensive research on the subject. “We don’t have anything like that anywhere in our history” of data, going back to 1933, he says.”

    If the secrets to markets can be decipher with historical data, then the Forbes 400 will consist of historians. Each market situation is unique and none ever repeat in exactly the same way.

  4. some guy commented on Sep 12


    Renaissance uses nothing but indicators and signals in their trading systems. From Wikipedia:

    Renaissance Technologies is a hedge fund management company. Renaissance was started by James Simons in 1982. At March 31, 2007, it held some $27 billion in public equity positions. Its $6 billion Medallion Fund has averaged 35% annual returns, after fees, since 1989, and is considered in the industry to be the most consistently successful hedge fund, yielding returns ten percentage points higher than legendary investors Bruce Kovner, George Soros, or Paul Tudor Jones. [1]

  5. PC commented on Sep 12

    Some Guy,

    I guess all the indicators that Simons used didn’t save his fund from the losses in this recent decline.

    BR: He had some losses in July and August, which have already been made up for.

    He’s up 23% YTD.

    Renaissance Technologies shatters the random walk theory, and makes a mockery of the EMH . . .

  6. lurker commented on Sep 12

    I am totally with PC on this. There are no “rules” cuz then we would all be billionaires. As for Renaissance, how do you REALLY know how they do it? I imagine they work pretty hard to cover their tracks and hide their activity in the market. When I look at their holdings I see a lot of small cap value, but that may be only a fraction of their huge portfolio…only Mr. Simons knows fur sure. PC, you should give credit to Warren for that historians quote as I think he said or wrote that first. Peace.

  7. shoeless commented on Sep 12

    I was an investor in Renaissance in my role as PM for a Fund of Funds. They gave/give NO information about their trading models/algorythms, but I know that most are very short term signals, which have very little to do with underlying company fundementals.

    To give you an idea of their concerns about the proprietary nature of their models, they will not provide daily or even weekly performance estimates, for fear of some other quant group reverse engineering their models from the return data.

  8. michael schumacher commented on Sep 12


    I think you have something there. Why was it gotten rid of so quickly when it has been discussed for years??.then all of a sudden it’s gone. I think it helps people get into shorts easier since they are not “confused” by rules. It most certainly has the affect of allowing a short to be placed (the naked part of it is still out of control which also adds greatly to the fire)

    Add in the b’rupcy law change and it starts to look like all of this was forseen months in advance…..LOL


  9. Jay Weinstein commented on Sep 12

    I agree with PC as well–while I am skeptical of the value of TA on anything, for sure it has more value for individual stocks than the market as a whole.

    I have a longer thought—all I hear is the bulls say “buy because we will avoid a recession” and bears say the converse.

    But I view “recession” as irrelevant. I mean, as investors, [i don’t trade], who really cares whether GDP drops or not!?! Like TA for the market, if you are invested in the components of the economy that are booming, who cares about those that aren’t ?

    This is what i keep telling the mega bears–my clients are up over 20% with no leverage or short selling this year. I own almost no financials and lots of small industrials that are participating in the worldwide capital spending boom. I don’t own high end retailers, but obviously they are thriving as well. I don’t want exposure to poor Joe Sixpack who is taking the brunt of $3 gas and the blowup of mortgages and inflation ex-inflation [as BR likes to say].

    So I just think whether we fall into technical recession or not is a useless discussion.

  10. Gary commented on Sep 12

    How many of these big funds or other money managers are using similar quant or technical strategies? The information is becoming commoditized and losing value. And how many are using stupid computers to trigger buy/sell? Hey the S&P hit its 50 day moving average (or whatever the indicator) — buy, buy, buy. Great for “stable” markets, but throw in some uncertainty and you get extremes until a new trend is established.

    Just a thought.

  11. ari5000 commented on Sep 12

    Barry — I think you would do a lot better doing what you do — analyzing reality instead of past action.

    There were good reasons stocks were a buy after the 1987 drop — mainly because the market dropped 20% plus… but other reasons besides… What was the market YTD after the 87 plunge? I assume it was negative for the year?

    Now the SP index might be off 6% from its high — but it’s still positive for the year…

    I don’t understand how you can ‘bargain hunt’ after the markets have been up 4 years in a row and are STILL positive for the year despite a broken dollar, looming foreclosures, high inflation, record earnings/margins for most companies…

    I actually heard someone on CNBC say the markets are a discounting mechanism — like that holds anymore.

    I think the only question to ask is: What would the greedy pigs do? They’ll be happy to do a 9/11 patriot rally… but now they need to get out so a morning push to allow for some distribution all day long.

    If Bernanke doesn’t signal a willingness to stop the falling dollar — we’re all in big trouble.

    By the way — I watched you CNBC the other day. I notice that everyone agrees with you — but they get real quiet and try not to ask you any follow up questions. Like every time they hear a reality check they want to pretend they didn’t hear it.

    Very amusing how the hedge funds can ignore reality. I guess it’s a winning strategy… up to a point.

  12. The Financial Philosopher commented on Sep 12

    Barry, I’m sure your familiar with “heuristics” or patterns that the human brain seeks, then follows, assuming whatever “reward” it has given us in the past will continue again. I know my comment won’t be popular among some of your readers, but that is “rat brain” behavior. I’ve observed (through research, not personal experience) that at least three significant “quant” failures have occurred in the past 30 years. They seem to coincide with market cycles (perharps your resources and knowledge could confirm this).

    The problem is that financial market “patterns” almost never repeat in the same way.

    I will humbly admit that I enjoy the attempt of “solving puzzles,” challenging conventional wisdom, and finding answers to the most difficult of questions…

    Anyone (especially men) who are married and reading this will know that it is often better to listen and resist the temptation of offering a solution…

    As J. Krishnamurti said, “Freedom from the desire for an answer is essential to the understanding of a problem.”


  13. mhm commented on Sep 12

    The sell short uptick activation was largely ineffective since trading systems became automated (market order type).

    All you need is to 1) send your sell short order, 2) send a limit sell 100 if the bid/ask spread is too large and 3) send a market buy 100 to get the uptick and the intended sell short activated.

    That was handy in less active stocks.

  14. techy2468 commented on Sep 12


    i read somewhere that 74% of money in market is managed by funds not by investors themselves….which explains why the market is not discounting the future.

    fund managers dont want to stay in cash (or they cant) what is their risk if their fund goes south with the market….not much they will get another job….blaming the market for the downfall.

    and you can add another 10% of money invested by bulls who cant see reality.

    as 2001 was witness….markets are usually the last thing that goes south……and when they start their descent, reality is again replaced by fear…

    but till then…..we will have to bear with these people who are just playing with others money.

    i am wondering why pension funds wont pull out from market right now….what aboout 401k/IRAs held by individual investors…why wont they move to money market account?? if anyone knows the answer, please share it.

    i have read that hedge funds have 2-3 trillion, and they have locking periods….which means the fund managers dont care for investors right now.

  15. michael schumacher commented on Sep 12

    you can thank china for yesterday and today…..and for propping this whole POS market up until tuesday…

    there I feel better now


  16. Groty commented on Sep 12

    I guess all cycles are different, but this one came out of bizzro world.

    Consumers kept spending during the recession; housing boomed; as the economy strengthened the FED tried to slow things down but long rates didn’t follow the fed funds rate higher as the FED raised rates 425 basis point; emerging markets outperformed – actually thrived, while the U.S. grew below trend, etc., etc., etc.

    Add in the fact that during this cycle, Wall Street sold a couple trillion dollars worth of securities that investors have difficulty valuing/marking,trading. Some investors worry about time bombs and recessions from the credit cruch while others see value in equities at current multiples with interest rates as low as they are.

    Throw out the playbook.

  17. Fred commented on Sep 12

    The explosion of ETF’s and “Ultra” ETF’s has undoubtedly moved the volatility needle several standard deviations (just look at the volume!) They create “double/quadruple buys/sells”. These are the choice tools for these “active” hedge funds you mention.

    The 90% days rule may have “less teeth” due to the constant two sided trading recently, but more telling to me is the standout insider buying.

    I don’t believe I’ve seen you discuss this Barry…am I mistaken?

  18. speedlet commented on Sep 12

    Is it possible that the number of 90% reversal days is the result of the enormous amount of short interest/short selling out there?

    The two are probably correlated — 90% up days are just massive short-covering rallies.

  19. VJ commented on Sep 12

    Paul Desmond, president of Lowry’s Reports, spoke to this on Monday as well:

    PAUL DESMOND: We think we roll into a bear market. We think we are in the early stages of a full-fledged bear market. We generally, the cycles of bull and bear markets follow a regular course. They tend to occur at about a four-year or 52-month cycle. In this case, the last major market bottom was in October of 2002. And we should have already seen a market top. So this bull market has been — lasted longer than most bull markets last. And when that has happened in the past, it’s generally lead to a more intense bear market when it finally does develop.

    JEFF YASTINE: One of the things you are looking for are these 90 percent upside days, 90 percent downside days. Explain those for a moment.

    DESMOND: In the process of the panicked selling, we see what we refer to as 90 percent downside days which means that 90 percent of all of the volume, 90 percent of all of the price action on a particular day was on the downside. It simply means heavy panic selling where people are just dumping stocks as fast as they can get out. Generally in a major decline, you will see a series of these 90 percent downside days on the way down.

    YASTINE: All right. So we’ve had a market decline since mid-July or so. How many of these 90 percent down side days have we seen so far?

    DESMOND: Well, this market has been highly unusual in that we started to see these 90 percent downside days, these panic selling days very quickly after the top. The top of this market was on July 19th. That is where the Dow and the S&P topped. And by the 23rd, we were seeing our first 90 percent downside day. What that says is that investor psychology is extremely nervous, that they are on the edge of panic on a fairly regular basis. And that’s — that’s the kind of environment that an investor should step aside from. You don’t want to be — you don’t want to be caught in a panic situation.

    YASTINE: So people who follow your methodology might think all right, we’ve seen a bunch of these 90 percent downside days. The bottom in the market has to be close at hand.

    DESMOND: Well, if you go back in time, for example, if you go back to the 1973, 1974 bear market, we had 14 of these 90 percent downside days between early — early 1973 and the bottom in December of ’74. So the history says that when you start to see two or more 90 percent downside days, the best policy is generally to get to the sidelines and wait out the decline, just be very patient and relaxed until the last 90 percent downside day is eventually followed by a 90 percent upside day. And that would be a relatively strong indication that we probably turned the corner and the bear market is over.


  20. tabasco commented on Sep 12

    Paul Desmond makes a great point. When discussing 90 percent down days, how about we look at a time period with market fundamentals more closely resembling today’s market? Like comparing with 1973-74 instead of comparing with 1987 or 1990? Apples to apples instead of apples to oranges.

  21. Fred commented on Sep 12

    I fail to understand why Desmond doesn’t mention the fact that there have been several 90% UPSIDE days as well. This changes the statistical results meaningfully.

    It’s a two sided market.

  22. mote commented on Sep 12

    Decimalization of the stock market began in August, 2000. Today, a particular security is far more likely to move penny up or down than under the old fractional system. This gave cause for the daily market breath readings among the unchanged issues to fall dramatically, thus affecting various technically oriented ratios. For instance, “unchanged volume” was calculated as the sum volume of all unchanged issues. Today, a calculation of daily unchanged volume is inherently minuscule, being in itself a drastic departure from readings observed during the fractional trading era.

    In many respects, the previously utilized tools in market breath analysis need to be judged within the context of the post-2000 era of stock market trading rather than on their longer historical record.

  23. ari5000 commented on Sep 12

    The ‘enormous’ short interest out there?

    Is this true?

    It seems that everyone is leveraged one way — to the upside!

  24. Aaron commented on Sep 12

    It has been amazing to see the number of 90% days in the past month or so, on both the down and upside. It’s hard to believe there could be so many 90% days on each side, but the market seems to be full of lemmings more and more now I guess who just follow the lead intraday.

  25. angryinch commented on Sep 12

    Insider buying is an atom on a pimple on a dust mite on the left nut of the market. One finagler alone—Tan Angelo—has dumped more this year than all the financial insider buyers put together.

    Much was made a couple weeks ago about some Wachovia board member who bought a few million worth of shares at $45. “See! Bullish insider buying!”, cried the bullsie-wullsies. Not so fast. Turns out this guy buys a few million shares every August, price-insensitive. Whoops…

    What does a few hundred million worth of insider buying over six months mean to a market with a $14 trillion capitalization? Zilch, nada, nuttin’. Especially when you consider the billions upon billions getting dumped left and right as the market rose.

    And even if these insiders are correct—and there’s no guarantee they will be—it could take 2-3 years for their confidence to be rewarded. Insiders were buying after 9/11 and all during the first half of 2002. But the market went down anyway and it took these folks 2-3 years to get whole.

    Follow price, not the penny-ante insider buying.

  26. corky meets mr. clean aka jeff macke commented on Sep 12

    “Some Guy,

    I guess all the indicators that Simons used didn’t save his fund from the losses in this recent decline.

    BR: He had some losses in July and August, which have already been made up for.

    He’s up 23% YTD.

    Renaissance Technologies shatters the random walk theory, and makes a mockery of the EMH . .”

    RIEF was up 60 bps in Aug, Medallion is up over 50% YTD according to hedgeworld-

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