Stocks in rising trends have given excess return in the Nordic countries

Published 18 March 2019. Norwegian original here >>

By Senior Analyst and Researcher Asbjørn Taugbøl.

Investtech was established in 1997 and works with research within behavioural finance and technical and quantitative stock analysis. The company has developed an analysis system that identifies trends, support and resistance, formations and volume patterns in stock prices, and generates buy and sell signals on this basis. Investtech uses advanced mathematical algorithms and statistical methods in computer programmes and online subscription services. Mr. Asbjørn Taugbøl is a researcher and senior analyst with Investtech.

Keywords:
Finance, technical analysis, trend, buy signals, price prediction.

Abstract:
Trends are some of the most important elements in the theory of technical analysis, and are widely used by investors as basis for investment decisions. A rising trend is the result of investors’ on-going optimism. The theory says that stocks in a rising trend will continue to move within the trend. To what extent is this true and can it be used to get excess return? Investtech's research into data from 1996 to 2018 for the Nordic stock exchanges shows that stocks in rising trends identified by Investtech's automated analysis systems have given significantly better return than benchmark in the months following the signal.

Introduction

This report is part of a research project which investigates whether trading strategies based on trends have given excess return compared to average stock exchange development.  A report has been published for trend signals on the Oslo Stock Exchange in Norway, see Stigende trender har gitt god meravkastning" (available in Norwegian only.) We now look at results for rising and falling trends in Norway, Sweden, Denmark and Finland combined.

Trends

Trends are one of the most important elements of technical analysis. They are visual and intuitive and describe in which direction a stock is moving. A rising trend indicates lasting and increasing optimism among investors, often as a result of a great deal of positive news about the stock.

The trend gives the rate of increase for the stock price, and extrapolating trend lines gives the price target for the stock. There are gradual transitions between rising trends, horizontal trends and falling trends.

The literature on the subject states that "The trend is your friend", meaning that stocks in rising trends will continue to rise within the trend channel. With this starting point, it is important to identify and buy stocks as early as possible after a rising trend is established.

Identifying a trend requires studying the price movements. Stock prices rarely move in a straight line. Instead they move in a series of tops and bottoms. Drawing a straight line through two or more rising bottoms produces the support line in a rising trend. See figure 1. Continue to draw a line parallel to the support line thought the rising tops. This line is called the trend’s resistance line. Support and resistance lines combined make up the trend, see figure 2.

Figure 1.
Support line in a rising trend.

Figure 2.
Rising trend with support line and resistance line.

Similarly, a falling trend is produced when a straight line can be drawn through two or more falling tops and a parallel line through falling bottoms.

Many investors identify trends by studying charts and drawing trend lines by hand. This method has many weaknesses, the most important of which is that it is subjective. You see the trends you want to see and which perhaps fit your own subconscious preferences. It is also a very time consuming method. Investtech has developed automatic algorithms for identification of trends. Every day these algorithms identify the “best” trend in the chart, on criteria such as distance between the trend’s support and resistance lines and the number of data points near these lines. Roughly 80,000 various trend alternatives are assessed each day for a medium term Investtech chart with 18 months of historical data. These are given a score and the best trend is selected.

Figure 3. Rising trend where a stock with positive fundamental development over time fluctuates between a pricing of P/E=12, which many investors think is cheap, and P/E=15, which many investors think is expensive.

Figure 4. Example of rising trend identified by Investtech's systems. The stock is in a rising trend channel, has triggered buy signal from rising trend and is indicated to continue upwards in the rising trend.

Data

We have studied stocks on the Nordic markets Norway, Sweden, Denmark and Finland. For Norway we have data from 1996, and for Sweden from 2003, Denmark from 2005 and Finland from 2007. For all countries we looked at data until 31. December 2018. We have identified signals until 27 September 2018, in order to study price development for 66 days (3 months) after the last signal.

All stocks that have been listed in the period are included. Stocks that have been delisted due to for instance mergers, takeovers and bankruptcy are included. All prices are adjusted for splits, dividend payments, reverse splits, and other corporate capital changes. Minor dividends in foreign currencies are generally not registered, with the exception of dollar dividends on the Oslo Stock Exchange.

Minimum liquidity requirement was set to 500,000 krone as a daily average for the past 22 days. For Finland we set the limit to 50,000 Euro.

Results

We have studied stocks in rising and falling trend channels in Investtech's medium long term price charts. We defined a buy signal when a stock was in a rising trend and a sell signal when it was in a falling trend.

A rising trend is defined by a rate of increase above 10 degrees in Investtech's charts and a falling trend by a rate of increase of less than -10 degrees. This gives different annual rates of increase for different stocks, depending on the stock's volatility and the range of variation in the charts.

For stocks that have been in rising or falling trends for a long time, at least 22 trading days were required before the stock would trigger a new signal in the same direction.  This is done in order to avoid near-doubles. Even so a large number of signals will be quite similar, because quite a few stocks follow each other closely in terms of prices. Especially when the exchange has risen or fallen a lot in a short time, many stocks will trigger signals at the same time. The signals (samples) will therefore not be independent, and statistical measures for uncertainty (standard deviation) cannot be used indiscriminately.

Norway Sweden Denmark Finland Total
Buy signal, rising trend  12,349 23,327 5,663 4,619 45,958
Sell signal, falling trend 8,489 12,405 3,024 3,025 26,943
Total number 20,838 35,732 8,687 7,644 72,901
Share of total  29 % 49 % 12 % 10 % 100 %

The table shows the number of buy and sell signals from rising and falling trends.  Investtech’s computers identified a total of 45,958 cases where a stock was in a rising trend and 26,943 cases where a stock was in a falling trend. These were counted as buy signals and sell signals respectively.  The data country distribution is 29 % from Norway, 49 % from Sweden, 12 % from Denmark and 10 % from Finland.

Buy and sell signals are compared to each other and the benchmark index. We used the standard dividend adjusted indices, respectively Hovedindeksen (OSEBX), OMX Stockholm Benchmark GI (OMXSBGI), OMX Copenhagen 25 GI (OMXC25GI) and OMX Helsinki GI (OMXHGI).

Trend Norway.

 

Trend Sweden.

 

Trend Denmark.

 

Trend Finland.

 

Figure 5: Price development the first 66 days following trend signals in the Nordic markets.

The chart shows average price development following buy and sell signals from rising and falling trends respectively. The signals are triggered on day 0. Only days when the exchange is open are included, so 66 days equal approximately three months. Buy signals are the blue line and sell signals are the red one. The shaded areas are the standard deviation of the calculations. Benchmark index is the black line.

Average return after 66 days Norway Sweden Denmark Finland Weighted average
Buy signal from rising trend  5.3 % 5.0 % 5.1 % 3.1 % 4.9 %
Sell signal from falling trend -0.1 % 1.4 % -0.8 % 0.3 % 0.6 %
Benchmark 3.1 % 3.6 % 2.6 % 1.2 % 3.0 %

The table shows return 66 days (approximately 3 months) after signal was triggered.

The results are quite uniform across the four markets. In all markets stocks with rising trends rise more than benchmark and stocks in falling trends underperform vs benchmark .

Annualized return Norway Sweden Denmark Finland Weighted average
Buy signal from rising trend 21.9 % 20.4 % 20.9 % 12.4 % 20.0 %
Sell signal from falling trend -0.3 % 5.6 % -3.1 % 1.0 % 2.2 %
Benchmark 12.2 % 14.2 % 10.1 % 4.7 % 12.1 %

The table shows annualized return. The figures are calculated by repeating 66 day return four times.

Annualized excess return Norway Sweden Denmark Finland Weighted average
Buy signal from rising trend 9.8 %p 6.1 %p 10.8 %p 7.7 %p  7.9 %p
Sell signal from falling trend -12.4 %p -8.6 %p -13.2 %p -3.7 %p -9.9 %p

The table shows annualized excess return in percentage points (%p), i.e. the difference between return and benchmark.

Figure 6: Price development following trend signals in Norway. Same as figure 5, but including price development in the days before the signal was triggered.

Figure 6 clearly shows that stocks that have risen on average continue to rise, and that stocks than have fallen continue their weak performance.

Annualized excess return of 7.9 percentage points for buy signals and -9.9 percentage points for sell signals are considered to be very good results.

Robustness over time

Stock markets developed quite differently in the early 2000's compared to the past few years. We want to see if buy and sell signals from trend channels behave consistently in different time periods, and have run the same analyses for the past five year period. We study relative numbers to get a fair comparison. We look at average return for signals compared to average return for the benchmark indices.

Relative return after 66 days Full period (1996-2018) Past five years (2014-2018)
Buy signal from rising trend 1.9 %p 1.7 %p
Sell signal from falling trend -2.5 %p -1.5 %p

%p: percentage point difference vs benchmark.

Annualized excess return: Full period (1996-2018) Past five years(2014-2018)
Buy signal from rising trend 7.9 %p 7.0 %p
Sell signal from falling trend -9.9 %p -6.1 %p

The top table shows that average excess return for stocks with buy signals was 1.7 percentage points the past five years and 1.9 percentage points for the whole period from 1998 to 2018. So somewhat weaker in the last period, but still a strong number. Sell signals are also somewhat weaker in the last period, but still strong, i.e. sell signals have given clear negative excess return. Annualized excess return after buy signals the last five years was 7.0 percentage points, vs 7.9 percentage points for the whole period. Sell signals gave an annualized negative excess return of 6.1 percentage points the past five years vs -9.9 percentage points for the whole period.

 

Norway.

 

Sweden.

 

Denmark.

 

Finland.

 

Figure 7:  Relative return 66 days after buy signals from rising trend in five-year intervals. Positive numbers means that buy signals in the period on average have risen more than benchmark in the same period. Note that the periods vary by market after available history. Last period is the four years of 2015 to 2018.

Figure 7 shows that relative return for stocks with buy signal from rising trend vary over time and across markets. This is expected and is largely due to ordinary market variations from year to year. On average, buy signals have outperformed benchmark for 13 out of 15 periods. The two negative periods were only marginally weaker than benchmark.

These periodical statistics indicate that trend signals are robust over time.

Liquidity

Big companies, which tend to have high turnover at the stock exchange, generally get more attention from analysts, investors and media than smaller companies. This means that information about the bigger companies reach the traders faster than it does for the smaller companies. This difference may cause the signal power of trends, and the chances of excess return by following these signals, to vary between smaller and bigger companies.

We split the companies into two groups of more or less the same size; those with average daily turnover above and below five million krone. For Finland we used 0.5 million euro as the limit. We studied stocks with buy and sell signals from rising and falling trends respectively. The results are shown below, with smaller companies on the left and bigger companies on the right.

a) Norway smaller companies.

 

b) Norway bigger companies.

 

a) Sweden smaller companies.

 

b) Sweden bigger companies.

 

a) Denmark smaller companies.

 

b) Denmark bigger companies.

 

a) Finland smaller companies.

 

b) Finland bigger companies.

 

Figure 8: Return for stocks with buy and sell signals from rising and falling trends respectively. Stocks with average daily turnover below five million krone on the left and above five million krone on the right.

Stocks with buy signal from rising trend
Relative return after 66 days Norway Sweden Denmark Finland Weighted average
Smaller companies 3.2 %p 2.5 %p 3.1 %p 2.6 %p 2.8 %p
Larger companies 1.3 %p 0.2 %p 2.0 %p 1.3 %p 0.9 %p

Stocks with sell signal from falling trend
Relative return after 66 days Norway Sweden Denmark Finland Weighted average
Smaller companies -2.6 %p -2.8 %p -5.0 %p -1.5 %p -2.8 %p
Bigger companies -4.2 %p -0.9 %p -1.6 %p 0.0 %p -1.9 %p

%p: percentage points

In smaller companies, stocks with buy signal from rising trend gave an average weighted excess return of 2.8 percentage points vs benchmark index in 66 days. The bigger companies gave an average weighted excess return of 0.9 percentage points.

Buy signals from rising trend thus appear to have stronger signal power for smaller companies than bigger ones. It looks as though buy signal from rising trend is more reliable if the stock has a daily turnover of less than five million krone per day than if they have turnover above five million. However, buy signal from rising trend indicates future excess return for bigger companies as well. Average annualized excess return has been on average 11.9 percentage points at buy signal from rising trend for smaller companies and 4.4 percentage points for bigger companies.

Smaller companies with sell signal from falling trend gave a negative excess return of 2.8 percentage points the following three months. The bigger companies gave a negative excess return of 1.9 percentage points. Average annualized excess return has been -11.3 percentage points at sell signal from falling trend for smaller companies and -7.7 percentage points for bigger companies.  Sell signals thus appear to have good signal power for both smaller and bigger companies, but with the same tendency as for buy signals, with stronger signals for less liquid companies.

We have different figures for the four Nordic markets, but the relative conditions are very similar. Consistency across countries strengthens the results: trend signals have shown strong predictive power for smaller companies, both for buy and sell signals. Buy signal from rising trend has also given excess return for bigger companies, and sell signals from falling trend have given negative excess return vs benchmark, but results are a little weaker than for smaller companies.

Summary

We have studied Nordic stocks listed on the Oslo Stock Exchange in Norway since 1996, OMX Stockholm in Sweden since 2003, OMX Copenhagen in Denmark since 2005 and OMX Helsinki in Finland since 2007. Investtech's systems identified 45.958 cases where a stock was in a rising trend and 26.943 cases where a stock was in a falling trend. These were called buy signals and sell signals respectively. We studied what happened after these signals were triggered.

The results are consistent across the four markets and show that stocks in a rising trend continued to rise and more so than benchmark over the next three months. Stocks in a falling trend continued to underperform compared to benchmark. Excess return three months after buy signal was on average 1.9 percentage points. Negative excess return three months after sell signals was 2.5 percentage points on average. Annualized this is 7.9 percentage points excess return and 9.9 percentage points negative excess return respectively.

The results are quite consistent over time. The past five years’ excess return from buy signals from rising trend was 1.7 percentage points compared to 1.9 percentage points for the whole period.

We split the companies in smaller and bigger companies. The results were stronger for smaller companies than the bigger ones. Smaller companies gave 2.8 percentage points average excess return in three months, vs 0.9 percentage points for the bigger companies.

Combined the results show that buy signals from stocks in rising trend give statistically better return than average benchmark.

 

We have also done this same study on the Indian market, with similar results. Read the report here.

Keywords: Buy signal,falling trend,Nordic markets,rising trend,Sell signal,statistics,trend signal.

Written by

Asbjørn Taugbøl
Analyst
at Investtech

Pro tip:
Stock selection
Using the tool Stock selection you can for instance find all stocks with a positive trend and liquidity of your choice.

The Trend Bible by Investtech contains all you need to know in order to make statistically sound stock investments based on signals from trends.

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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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