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Many times, a question asked of STOCKS & COMMODITIES readers will more than likely find an answer — and more than an answer, further questions. Such was the article that E. Michael Poulos presented early in 1991, when he showed how assumed trend tendencies ain't necessarily so. Here, Stuart Meibuhr answers one of those corollary questions. If certain futures contracts show decided trend tendencies, can the same be said about certain stocks or indices?

The question that E. Michael Poulos asked in the January 1992 STOCKS & COMMODITIES was "Which futures trend the most?" In turn, that question triggered a corollary question, "Which stocks or stock indices trend the most?" Poulos's methodology involved measuring the difference between the highest high and the lowest low for seven channel lengths (days) from 1 to 49. The range was averaged to arrive at an average channel height for one-, two-, four-,nine-, 16-,25-, 36- and 49-day channels. Each average was divided by the average for the one-day channel to arrive at a ratio.

Applying the same methodology to several market indices and seven stocks provided some enlightening information. A spreadsheet program was used for the calculations on data transferred from a charting program. Only those securities with histories dating to back before 1985 were used. Data for any holidays were eliminated before the trend calculations. All calculations were performed on data dating from January 2, 1985, to January 31, 1992, a period of seven years and one month.

For each security, I analyzed six different time periods, which consisted of the entire data set; the first year, the first two years; the last year; the last two years; and one year selected from the middle. This ensured that the ratios were independent of the selected time periods. This turned out not to be completely true. For example, the data in Figure 1 for the OEX are shown for these six different time periods.

Although some variations amounted to almost 10% between the smallest and the largest ratio for any given time period, the trends from the shortest to the longest time period remained the same. Consequently, the ratios for only the entire seven years and one month of data are reported here for the other studied securities. These results for five stock market indices and seven stocks can be seen in Figure 2.

The indices and the stocks are ranked separately in descending order of their ratios. The data for the S&P 500 represent only six years and seven months and differs significantly from those reported by Poulos. The data here were for the S&P 500, whereas Poulos's data represented spliced future contracts and the time periods covered were different. The trending tendency of indices appears to increase with the increasing number of securities that make up that index. Unfortunately, that does not explain why the Major Market Index (MMI) (Figure 3) showed a greater trending tendency than did the Dow Jones Industrial Average (DJIA) (Figure 4), the tendency of which was extraordinarily low. The DJIA values were consistently below the square root point, which, according to mathematician W. Feller, evinces a lack of trends. All other indices showed strong trending characteristics, with the over-the-counter (NASDAQ) showing the strongest trending action (Figure 5).

All seven stocks showed good trending behavior, with Eli Lilly & Co. (LLY) having the biggest numbers and Xerox (X) ranking last for trending tendency. Other companies and symbols are: General Motors (GM), IBM, Merrill Lynch (MER), National Medical Enterprises (NME) and Texaco (TX).

TRADING IMPLICATIONS

If options are the tradeable, then it is imperative to follow the index on which the options are based and not the DJIA, because the DJIA tends not to trend. The same conclusion can be drawn about stocks; the short-term trader would prefer to deal in options on stocks that have high trending behavior. Overall, with this methodology, the trader can ascertain the trending behavior of any security before expending time and capital on a trade.

Stuart Meibuhr trades stocks and options for his own account. He has lectured and taught on computerized investment topics for the past 10 years.