Friday, July 25, 2008

Putting Thursday's Drop Into Context

After making a new 200-day low last week, the S&P 500 made a nice bounce over the next six days. About half of that six-day bounce was erased Thursday as the market took it on the chin. I conducted a study to see what’s happened following similar circumstances in the past.

Winners and losers were split right about down the middle over the next week to week and a half. Notable is the fact that losers outsized winners by a significant amount from 5 to 10 trading days out. So while the odds are 50/50, risks greatly outwiegh rewards. I ran the test under a few different scenarios. One was using a 2% drop instead of the 1.5% shown above. The results were very similar with fewer instances. I also looked at using a 100-day low instead of 200. In every iteration I ran it appeared there was a downside edge for the first 5-8 days followed by a bounce through day 15 or so and then another pullback through day 20.

Looking at the results of a 2% or greater drop after a bounce from a 200-day low I found that 47% of them went on to make new lows within the next 5 days. In every case where the market managed to hold above its recent lows for the next 5 days, it also held above them for at least 3 more weeks. The next five days may tell a lot about the sustainability of this attempted rally.


Anonymous said...

Thanks for the insightful posting. Incidentally, the biggest market mover (July nonfarm payroll) is coming in on the sixth day (Aug 1st) :)

Anonymous said...

In late june, ear. july money started moving into the pharma names, prob. from the weakening coal sector, however, quite a few names are setting at or just under major resist. points, if they break through next week, it could be a signal for a sector rotation...