Inside Day After a Big Rise: What Happens Next

Thursday was a strong day in the stock indices, and Friday retraced some of those gains as an inside day.

I went back to December, 1996 (N = 2395 trading days) and found 18 occurrences of down inside days following strong gains of 1.5% or more in SPY. Interestingly, expectations were not favorable over the next two days. SPY averaged a loss of -.24% (8 up, 10 down) two days after the inside day--much weaker than the average two-day gain of .06% for the entire sample.

The same pattern held true for inside days following gains of 1% or more (N = 39).

Perhaps the most interesting finding is that we haven't seen such a pattern (up more than 1.5% followed by a down, inside day) since December, 2002. We've seen four rises of 1% or more followed by down, inside days since the recent bull market began in 2003; three of those four occasions were down one day later.

We're up nicely prior to the open as I'm writing this thanks to overseas strength. We'll see if this proves an exception to the pattern.