The International Securities Exchange ISEE index reached a multi-year high just before New Years, reaching 206 on December 29. Here's a screen capture of the index since the start of 2006 (from the ISE website). The ISEE index has not been above 200 since early 2006.
And here's a look at the index since the end of July (same source)
I was curious about what this abrupt rise in ISEE might portend for the stock market, I downloaded all available ISEE data from ISE website (April 1, 2002 to Dec 31, 2008) and SPX data from Yahoo Finance on January 1st 2009. I then analyzed the data in either Excel or S-Plus.
My first concern is whether this rise in the ISEE index might be related to either Christmas or end-of-year effects. If Christmas or end-of-year plays a role in ISEE, then one would expect to see a similar effect each year. I compared each year's ISEE index over the course of the year. Here's a plot of the ISEE index broken down by year, with each year's data aligned to the end-of-year. Note the ISEE index began on April 1, 2002.
The daily mean, calculated by averaging the ISEE index from all years, is plotted as a thick blue line. It appears that the ISEE tends to rise towards the end of the year, peaking 10 trading days before the end of the year, which would be about a week before Christmas. However, between Christmas and New Years, there is not consistent trend. This year's ISEE rise above 200 can not be explained by end-of-year tendencies.
So what does this sudden rise in ISEE mean?
Here's a look at the entire history of the index (beige line), compared to the SPX (S&P 500, black line). In this chart, I've multiplied the ISEE values by 10 so that the index can be superimposed with SPX. I've added the 10 day moving average (10 DMA, purple line) and the 50 day moving average (50 DMA, navy line), as well as the average ISEE value over this time period (141, but on this chart, 1410, teal line)
While the ISEE index did reach a multi-year high before New Years, the 206 print is by no means exceptionally high for the index. Over the 2003-2006 period, ISEE was reguarly above 200 (2000 on the above chart).
Consider ISEE's 50 DMA in the above chart. From mid 2003 to early 2006, SPX rose and ISEE was above its mean value. From early 2006 to mid 2007, the stock market continued to rise, but ISEE was below its mean value. It would appear that the absolute value of ISEE is not related to SPX performance, or at least not obviously related.
However, on a shorter time scale, intermediate tops and bottoms in the stock market do appear to correlate with tops and bottoms in ISEE, or at least in ISEE's 10 DMA. In other words, ISEE's relative value appears to be related to stock market performance.
To try to illustrate this, I've plotted SPX since April 1, 2002 against the 10 day EMA of ISEE, with this value multiplied by 10 so that both indices are on the same chart. By using the EMA instead of the SMA, the moving average has less of a lag.
Here's the same chart looking at the 2007-2008 period only.
Tops and bottoms in SPX seem to correlate well with tops and bottoms in ISEE. I'll take a look at ways to trade based on ISEE in a later post.
And here's a look at the index since the end of July (same source)
I was curious about what this abrupt rise in ISEE might portend for the stock market, I downloaded all available ISEE data from ISE website (April 1, 2002 to Dec 31, 2008) and SPX data from Yahoo Finance on January 1st 2009. I then analyzed the data in either Excel or S-Plus.
My first concern is whether this rise in the ISEE index might be related to either Christmas or end-of-year effects. If Christmas or end-of-year plays a role in ISEE, then one would expect to see a similar effect each year. I compared each year's ISEE index over the course of the year. Here's a plot of the ISEE index broken down by year, with each year's data aligned to the end-of-year. Note the ISEE index began on April 1, 2002.
The daily mean, calculated by averaging the ISEE index from all years, is plotted as a thick blue line. It appears that the ISEE tends to rise towards the end of the year, peaking 10 trading days before the end of the year, which would be about a week before Christmas. However, between Christmas and New Years, there is not consistent trend. This year's ISEE rise above 200 can not be explained by end-of-year tendencies.So what does this sudden rise in ISEE mean?
Here's a look at the entire history of the index (beige line), compared to the SPX (S&P 500, black line). In this chart, I've multiplied the ISEE values by 10 so that the index can be superimposed with SPX. I've added the 10 day moving average (10 DMA, purple line) and the 50 day moving average (50 DMA, navy line), as well as the average ISEE value over this time period (141, but on this chart, 1410, teal line)
While the ISEE index did reach a multi-year high before New Years, the 206 print is by no means exceptionally high for the index. Over the 2003-2006 period, ISEE was reguarly above 200 (2000 on the above chart).
Consider ISEE's 50 DMA in the above chart. From mid 2003 to early 2006, SPX rose and ISEE was above its mean value. From early 2006 to mid 2007, the stock market continued to rise, but ISEE was below its mean value. It would appear that the absolute value of ISEE is not related to SPX performance, or at least not obviously related.
However, on a shorter time scale, intermediate tops and bottoms in the stock market do appear to correlate with tops and bottoms in ISEE, or at least in ISEE's 10 DMA. In other words, ISEE's relative value appears to be related to stock market performance.
To try to illustrate this, I've plotted SPX since April 1, 2002 against the 10 day EMA of ISEE, with this value multiplied by 10 so that both indices are on the same chart. By using the EMA instead of the SMA, the moving average has less of a lag.
Here's the same chart looking at the 2007-2008 period only.
Tops and bottoms in SPX seem to correlate well with tops and bottoms in ISEE. I'll take a look at ways to trade based on ISEE in a later post.
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