Thursday, January 12, 2006

Ten Days After the Runup

I just submitted an article to Trading Markets that should appear tomorrow. It takes a look at occasions since March, 2003 when we've had 1400+ new 65-day highs. Monday was our most recent occasion with over 1400 new 65-day highs, so the analysis has some current relevance. Specifically, I looked at what happens within a 10 days period following the surge in new highs: the maximum gain, maximum loss, and average price change.

Interestingly, half of the occasions (N = 26) occurred early in the bull market; half came later. The early occasions led to significant strength over the next ten days, with an average gain of 1.77% (10 up, 3 down). The later occasions were underperformers, with an average gain of .11% (7 up, 6 down). For the entire data sample (N = 703), the average ten-day price change was .63% (437 up, 265 down, 1 unchanged).

My speculation is that there is a developmental course to bull markets. Early on, strength begets strength during the swiftest portion of the market's ascent. As the rate of change slows and the market tops out later in the bull period, strength begets subnormal performance. My data suggest that the recent periods of market strength have not led to above average market declines. Rather, they've been followed by subnormal strength.

How we follow up the early strength in 2006 may say quite a bit about the relative youth vs. aging of this bull market.

BTW, the new high/low data and a very broad measure of market momentum called Demand/Supply are published daily on my personal site.