Why Thursday's Market Might Have Felt Unfamiliar

Thursday's trading was a true roller coaster, with sharp moves down, up, down, and then up. We closed well off the lows on very heavy volume, raising the possibility of this being a selling climax day. I went back to 1996 (N = 2576) and did a little nearest neighbor analysis to identify trading days most similar to today in SPY. These similar occasions (called nearest neighbors) had the following characteristics: 1) lows that were more than 1% below the day's open; 2) closes that were more than 1% above their days' lows; 3) relative volume (volume as % of 20-day average volume) greater than 1.5; 4) closing price within 1% of the previous day's close; and 5) the previous three days' price change down more than 1%.

I found 31 occasions matching these criteria. Five days later in SPY, the market was down by an average of -.79% (11 up, 20 down), considerably weaker than average.

Perhaps most interesting, of the 69 occasions in which we had a day that moved more than 1% below the open, but closed more than 1% above the lows on heavy volume, none of those occasions took place during 2005 or 2006 and only one occasion took place in 2004 and none in 2003. Nine instances occurred in 2002, eight in 2001, eleven in 2000, twelve in 1999, ten in 1998, and fourteen in 1997. The vast majority of occurrences took place during bear swings in the market: the three days prior to the roller coaster day averaged down by more than 2%.

In other words, this kind of high volume roller coaster day is much more typical of volatile market periods than the period we've had since 2003. If the market felt unfamiliar to you, there's good reason for it. This was action more common to bear markets than bull ones.