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Number Cruncher

Reading the momentum tea leaves Add to ...

What are we looking for?

We're looking at what makes the Canadian markets tick this week. Today we're going to show you how much a tick matters when it comes to the direction a stock is headed.

A tick shows you when shares have traded hands and the price at which it occurred. Not all ticks are equal when it comes to moving a stock - some activity is just the noise that crops up amid the churn of the market. Sometimes there's more to a tick than that.

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Traders call it momentum. It happens going up and going down. If you can measure it, then you can get an idea about whether any given trade is a good indicator of the stock's future short-term direction.

Alison Crosthwait, head of research at ITG Canada, has been crunching the numbers on the Canadian market to get a read on just how much momentum there is behind any given stock. Using her data, we're going to take a look at the stocks that have had the most momentum.

More about today's screen

The universe of stocks we're looking at is the S&P/TSX composite index in the first quarter of 2010.

To identify how much momentum there is behind a stock, Ms. Crosthwait takes the change in price over the day and divides it by the sum of the absolute value of all the price moves that day. So, if a stock moves down a penny, up three cents and then down a penny then the sum of the moves is five. Total change is up one penny. The momentum score would be 20 per cent.

What the measure calculates, Ms. Crosthwait said, is "the value of a price tick." As she explained, "Higher momentum means that intraday moves in the name are more likely to persist throughout the day as moves higher in the stock price. Lower momentum means that intraday moves in the name are more likely to persist throughout the day as moves lower in the stock price."

There's a predictive component, at least in terms of probabilities, she said in an e-mail, in that a stock with a high degree of positive or negative momentum one day is more likely to demonstrate the same thing the next day.

Ms. Crosthwait has used trading data from all the market participants - the TSX and the other alternative trading systems.

What did we find?

The names highlighted, for the most part, experienced the moves their momentum scores would suggest. What's interesting though is that this isn't just a list of the biggest winners and losers.

Calloway REIT's positive momentum helped it onto the list even though it barely cracks the top 100 in terms of year-to-date share performance on the index. Even Sears Canada falls outside the top 25 names over all.

So, what's the best way to think of this list? During the first quarter, these were the names to pick up or let go when you saw they were on the move on any given day - as Ms. Crosthwait explained, these stocks were the ones making the moves you could trust would hold.

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