I noticed that we made a 20-day high in the S&P 500 Index (SPY), while 20-day median daily volatility in SPY (median daily range over the past 20 days) made a 20-day low.
Going back to 2000, we have had 130 such instances of 20-day highs in stocks and 20-day lows in volatility. Five days later, SPY averaged a loss of -.32% (52 up, 78 down). By comparison, for the remainder of the sample, SPY averaged a loss of -.03% (1158 up, 1065 down).
I also saw that, as we made the 20-day high in SPY, my Demand measure of upside momentum (an index of the number of NYSE, NASDAQ, and ASE issues closing above the volatility envelopes surrounding their moving averages) was lower than my Supply measure (stocks closing below their volatility envelopes). Since September, 2002, when I began assembling those data, that has occurred 61 times. Five days later, SPY was down by an average -.45% (24 up, 37 down). By comparison, for the rest of the sample, SPY was up by an average .07% (904 up, 760 down).
In all, the declining volatility and momentum during a move to new highs has been associated more with short-term correction than a bullish edge. As I mentioned in the evening briefing, the rally is looking a bit tired.
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Dr. Brett
I have been following your blog for a few months now and I am impressed with the amount of very useful information which you supply for free. I pay for a couple of subscriptions which are not as consistent in their yield. I have been studying the markets (first with IBD, now with IBD plus extensive personalreading) for the past seven years. Like yourself, I come from the healthcare field (I am a certified internist and psychiatrist). Thank you.
A question: Could you at some point write briefly about how you harvest data for your research. Specifically, which software tools do you use to "crunch the numbers"? Is it part of your trading platform?
Respectfully,
Philip Pecoraro M.D.
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