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.
 

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.