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.

2 comments:

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...

Howdy,,
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...
Mac