The Trend Bible

Research Results – Liquidity and Signal Power

Rising trends give strong buy signals for both large and medium-sized listed companies. The strongest signals come from small and medium-sized companies. Sell signals from trends give strong indications of future negative excess return for both small and large companies.

Research Results – Liquidity and Signal Power

Large companies, that tend to have high turnover on the Exchange, generally get more attention from analysts, investors and media than smaller companies. This means that information about the large companies reach investors sooner than information from the small ones. An important element of technical analysis, and especially trend analysis, is how human psychology and behaviour are influenced by the news flow in the market. So then will trend signals for large and small companies have different signal power?

We split the companies into two groups of fairly equal size; those with daily turnover below and above 5 million krone. For Finland the cutoff was 0.5 million euro. We studied stocks in rising and falling trends in Investtech’s medium long term charts. Results below; small companies on the left and large companies on the right.

Figure 1: Return for stocks in rising and falling trends. Stocks with average daily turnover below 5 million krone on the left and above 5 million krone on the right.
 

Stocks in rising trends in the medium long term
Relative return after 66 days Norway Sweden Denmark Finland Weighted average
Small companies 3.1 ppt 2.6 ppt 2.7 ppt 1.1 ppt 2.7 ppt
Large companies 1.5 ppt 0.4 ppt 2.0 ppt -1.1 ppt 0.9 ppt

Stocks in falling trends in the medium long term
Relative return after 66 days Norway Sweden Denmark Finland Weighted average
Small companies -2.5 ppt -2.5 ppt -6.3 ppt -3.1 ppt -3.0 ppt
Large companies -4.7 ppt -1.1 ppt -2.2 ppt -0.4 ppt -2.5 ppt

ppt: percentage points

In the small companies, stocks with buy signal from rising trend in Investtech’s medium long term charts gave an excess return of 2.7 percentage points vs. benchmark after 66 days. The large companies similarly gave excess return of 0.9 percentage points. We see similar results for trends breaking up- and downwards, and for short and long term signals.

This indicates that buy signals from trends have stronger signal power for smaller companies than large ones. In other words: buy signals from trends are more reliable if the stock has a daily turnover below 5 million krone than if daily turnover is above 5 million krone. However, buy signals from trends indicate future excess return also for larger companies.

Sell signals have more consistent predictive power for stocks with both high and low liquidity. Small companies with sell signals from falling trends gave negative excess return of 3.0 percentage points in the coming three months. The large companies similarly gave negative excess return of 2.5 percentage points.

Sell signals thus seem to have good signal power for small and large companies both. There are some differences between the countries, with better predictive power for large companies in Norway and small companies in the other countries.

 

The Trend Bible was written in 2016 by Investtech’s Head of Research Mr. Geir Linløkken. The research team behind the Trend Bible also consists of Senior Researchers Asbjørn Taugbøl and Fredrik Tyvand.

The Trend Bible - Start Page

Investtech has worked on research into behavioural finance and technical and quantitative stock analysis since 1997. The company has developed an analysis system that identifies trends, support and resistance, formations and volume patterns in stock prices, and uses these to generate buy and sell signals. Investtech uses advanced mathematical algorithms and statistical methods in computer programmes and online subscription services.

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Investtech guarantees neither the entirety nor accuracy of the analyses. Any consequent exposure related to the advice / signals which emerge in the analyses is completely and entirely at the investors own expense and risk. Investtech is not responsible for any loss, either directly or indirectly, which arises as a result of the use of Investtechs analyses. Details of any arising conflicts of interest will always appear in the investment recommendations. Further information about Investtechs analyses can be found here disclaimer. The content provided by Investtech.com is NOT SEC or FSA regulated and is therefore not intended for US or UK consumers.


Investtech guarantees neither the entirety nor accuracy of the analyses. Any consequent exposure related to the advice / signals which emerge in the analyses is completely and entirely at the investors own expense and risk. Investtech is not responsible for any loss, either directly or indirectly, which arises as a result of the use of Investtechs analyses. Details of any arising conflicts of interest will always appear in the investment recommendations. Further information about Investtechs analyses can be found here disclaimer. The content provided by Investtech.com is NOT SEC or FSA regulated and is therefore not intended for US or UK consumers.

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