What Happens After a Broad Market Rise?

Note: A complete market update will be posted to the Trading Psychology Weblog this AM.

Wednesday's rise featured the highest ratio of advancing stocks to declining issues--about 6:1--that we've seen since 2001 (N = 1388 trading days). Thursday's market declined following this broad rise. I decided to take a look at how markets follow through on broad rises to see if that might tell us something about the market's near-term future.

Since 2001, we've had 43 days in which the ratio of advancing stocks to declining ones was better than 3:1. There has been a bullish edge in the S&P 500 Index (SPY) two days after the broad rise, with an average gain of over .25% (25 up, 18 down). That compares to an average two-day gain in the entire sample of .01% (727 up, 661 down).

When the broad rise was followed by a down day (such as happened yesterday; N = 18), the *next* five days in SPY averaged a gain of .46% (12 up, 6 down). When the broad rise was followed by an up day (N = 25), the next five days in SPY averaged a gain of .30% (14 up, 11 down). All told, there has tended to be a bullish leaning to the next five days of trading following a broad market rise.

Now for the caveat, however. When the market rise has been *very* broad (i.e., with advancing stocks outnumbering declining issues by more than 4:1), the market has been down on five of those occasions, as reported in today's post on the Trading Psychology Weblog. Could it be that moderately broad rises fare better in the short-run than very broad rises, simply because the very broad rises are indiscriminate in their buying? It's a hypothesis worth looking into.