Uptick Rule: A Clear Illustration That It Favors the Bulls

by Christopher Gurkovic, CMT

On February 25, 2009 FRB chairmen Ben Bernanke mentioned the possibility of reinstating the uptick rule.  I thought this would be a good opportunity to revisit the previous articles I wrote in Technically Speaking, first in September ’07 and then again in March ’08.  With a good year and half of data since the removal of the rule, a clear difference exists in trading.  Before the rule was removed, an unfair advantage was given to the Bulls.  The removal of the rule, has established an equal playing field to both Bulls and Bears.  This is proven with data from the NYSE TICK index. 

The TICK measures the NYSE stocks ticking up or down at a given time during the trading day, and should be looked at as a source of power and momentum in the market.  It is the best index to look at for differences from the uptick rule, as it directly measures up and down ticks.  The highest possible high for this index would be if all stocks are ticking up and lowest possible low reading if all stocks are ticking down.  I further refined the index and data, by developing an indicator based on this index of high and low ticks.  By dividing the number of high ticks by the sum of the number high ticks and low ticks, a percent indicator from 0 to 100% is derived.  This shows who has the upper hand for the day. Readings below 50% means the bears had more power for the day. Readings above 50% means that the bulls had more power for the day.  A reading of 50% would indicate neutrality among the Bulls and Bears.

The following charts show the % tick both before and after the removal of the uptick rule.  It is very interesting to note, that the average for the 413 days of trading before the removal averaged 59.64%, while the 413 days of trading after the removal averaged 49.90%.

 
(Click Image to Enlarge)


(Click Image to Enlarge)

Data source: Bloomberg

Looking at the charts, you can see that the 21 day MA fluctuated near the 60% level before the removal of the rule, while fluctuating around 50% after the removal of the rule.  This is very significant!  It becomes clear that the uptick rule favors the Bulls, while no rule makes it an even match.  As I proposed in the previous articles, the uptick rule is the equivalent of tying one paw behind the Bear’s back. Eliminating the rule allows the Bear fair use of both paws.  Since first fully instated in 1938, the rule has allowed 70 years for the Bull the gain a sense of false confidence in battling the Bear.  While it may have taken some time to set in before it all went to the Bulls head, the Bull eventually became self encompassed.  This unfair advantage to the Bull helped in creating the excesses that are now being wrung out of the market.  Yes, the Bull did not know what hit him when the Bear finally gained use of his other paw.  However, this does not mean the Bull is out for the count.  This blow from the Bear was needed for the Bull to become a little more modest.  The Bull will re-emerge one day after he realizes what hit him.  When this happens he will come to the playing field in full armor and be ready for the fight.  Tilting the playing field in favor of the Bull by reinstating the uptick rule is similar to some of the ridiculous stimulus plans we have heard about.  They are not long term solutions to the problems; rather, short term fixes that will eventually make things worse.  The numbers hold truth, and show a clear distinction.  50% is an even playing field, while 60% is a large and notable difference favoring the Bulls. 

Christopher Gurkovic, CMT, writes as Chief Market Strategist for Deltatide Capital Corporation.  He created the Gurk Oscillator, a proprietary indicator that combines several market internals into a short term trading oscillator.  The oscillator is published daily with commentary at www.deltatide.com.   Chris also works as an internal Market Strategist at ICAP/First Brokers Securities and earned an MBA from the Fox School of Business and Management at Temple University.