What Happens After 20 Days of Market Weakness?

Going back to 2001 (N = 1304 trading days), we've had 127 occasions in which the market (SPY) was down more than 5% in a 20-day period with a 20-day average Arms Index (TRIN) of greater than 1.2. (As of Wednesday, SPY was down about 5.1% over the last 20 days, with an average Arms Index of 1.27). What happens after such an intermediate period of weakness?

Interestingly, the outlook over the next five days is not favorable for the bulls. SPY five days later averages a loss of -.23% (56 up, 71 down). That is much weaker than the average five day gain of .05% (679 up, 625 down) for the entire sample.

By 20 days out, however, we have a different story. When SPY has been weak over a 20-day period with a high Arms Index, the next 20 days in SPY have averaged a gain of 1.52% (73 up, 54 down). That is considerably stronger than the average 20-day gain of .21% for the entire sample (747 up, 557 down).

In general, when the 20-day Arms Index has been above 1.2 (N = 410), the next five days in SPY have averaged a loss of -.17% (194 up, 216 down). That is quite a bit weaker than the average five-day gain of .14% for the rest of the sample.

It thus appears that 20 days of weakness, with volume concentrated among declining issues, has subnormal outcomes in the near-term, but favorable ones on an intermediate-term basis. This pattern in the past has been most helpful in anticipating trend changes. I'll be tracking potential changes on a daily basis here and in the Weblog.