Friday, October 30, 2009

More Volatility, More Weakness

Stocks did indeed close near their lows, trending lower through most of the session. By day's end, we saw the number of stocks making new 20-day lows across the NYSE, NASDAQ, and ASE stay over 2200--remarkable given yesterday's solid bounce.

I took a look at what has happened historically after we've had three consecutive days of 20-day lows exceeding 2000. Going back to late 2002, which is how long I've kept these data, we find only 39 instances of such weakness. The next trading day, the S&P 500 Index (SPY) has averaged a gain of about 1% (24 up, 15 down). I find no significant upside or downside edge after such a relief bounce.

What *is* particularly noteworthy is that such weakness has tended to occur during periods of heightened volatility. The standard deviation of next day returns following three days of significant weakness has been 3.63%, nearly three times the level of the remainder of the sample. Such heightened volatility was evident as far as 20 days out, doubling the level seen during other periods in the market.

That suggests that, whether or not weakness is finished, the recent levels of heightened volatility may persist into next week.


Matt Fahmie said...

Wow, Great Post. The increase in volatility has become blatantly evident over the past couple of days. Expecting it is going to continue represents increased opportunity if correctly planned for. I will spend the weekend tinkering with my position sizing and scaling methods to figure out the best way to adjust to the current market and match the opportunity it will be providing.

You should do a post on position sizing and scaling techniques. It represents such a large part of a traders success, and yet does not receive much attention from the blog community.

Take care


RMD said...

Dr. Brett,

You continue to outdo yourself. Your post about defending our market views was amazing . . . really.

With all that said, I have a technical question: You mentioned in this post more than 2700 new 20-day lows. I'm just now starting to track this data, and I could only find 2265 new 20-day lows on

Am I interpreting correctly, and your using a different data source?

thank you

Brett Steenbarger, Ph.D. said...

Thanks, Matt; great idea for future post. You're right: sizing--and how one uses size--is a huge part of success.


Brett Steenbarger, Ph.D. said...

Thanks, RMD, for the excellent catch. It should read over 2200 new 20-day lows, not 2700. I'll correct immediately--