A value over 100 indicates the stock is overbought, and expected to be weaker than normal going forward. A value under -100 indicates the stock is oversold, and expected to be stronger than normal going forward.
I’ve applied the Commodity Channel Index to four stocks below (AAPL, BA, CAT, and XOM), for the period 2007 – 2016. I used a period of 20 days to calculate the index.
Before looking at the specific results, let’s discuss what we would expect to see if the indicator has predictive value. We expect that whenever the indicator is less than -100, the average gain over the next N days will be greater than when the indicator is greater than -100. We also expect that whenever the indicator is greater than 100, the average gain over the next N days will be less than when the indicator is less than 100.
In the table I’ve included values of N for 5 trading days, 30 trading days, and 110 trading days (about 6 months). Let’s see how the indicator worked out:
|Days < -100||387||403||487||472|
|Days > 100||788||664||653||625|
|Days -100 to 100||1474||1582||1509||1552|
|Avg 5 Day Return < -100||+0.63%||+0.03%||+0.16%||+0.63%|
|Avg 30 Day Return < -100||+3.14%||+1.52%||+2.30%||+1.23%|
|Avg 110 Day Return < -100||+11.18%||+3.42%||+4.93%||+3.34%|
|Avg 5 Day Return > 100||+1.12%||+0.48%||+0.15%||-0.10%|
|Avg 30 Day Return > 100||+4.77%||+2.63%||+1.62%||-0.05%|
|Avg 110 Day Return > 100||+14.42%||+11.06%||+8.14%||+1.82%|
|Avg 5 Day Return -100:100||+0.33%||+0.32%||+0.37%||+0.03%|
|Avg 30 Day Return -100:100||+3.38%||+1.66%||+1.59%||+0.60%|
|Avg 110 Day Return -100:100||+14.59%||+7.22%||+7.00%||+1.45%|
Five day returns when the index is less than -100 are worse than when they’re greater than -100 for three of the four days, the opposite of what we expect.
Thirty day returns when the index is less than -100 are better than when they’re greater than -100 for two of the four days, so no predictive value there.
Similar to the five day returns, the 110 day returns when the index is less than -100 are worse than when they’re greater than -100 for three of the four days, the opposite of what we expect.
More investigation may be warranted for this indicator, but using the opposite of what was predicted (i.e., values over 100 indicating stronger forward returns, values under -100 indicating weaker forward returns). Over all, though, this indicator doesn’t seem to have much predictive value.
This is an analysis of past performance, but past performance is not a guarantee of future performance.
Comments / Questions: joseph AT StockMarketMovement.com