Wednesday, July 25, 2007

When New Lows in the Stock Market Explode

I notice that we made over 1500 fresh 65-day lows across the NYSE, NASDAQ, and ASE on Tuesday. Since 2004 (N = 858 trading days), that's been a pretty rare occurrence. Interestingly, following the 10 occasions in which we've exceeded 1500 new 65-day lows, the S&P 500 Index (SPY) has been up five days later all 10 times, by an average of 1.00%. By contrast, the average five-day gain for the remainder of the sample has been .17% (473 up, 346 down).

Nor have superior returns following an explosion of 65-day highs been limited to a short time horizon. When we look 30 days following the days in which we've had more than 1500 new 65 day lows, SPY has been up by an average of 4.28% (9 up, 1 down). Even when we relax the criteria and examine all occasions in which we've had more than 1000 new 65-day lows (N = 39), SPY has been up 30 days later by an average of 3.26% (35 up, 4 down).

In short, declines such as the recent pullback have been excellent opportunities to step up to the plate and buy stocks. It's been when no one has wanted a broad range of issues--pushing many of them to multi-month lows--that investors have found relative value.