When Days Are Flat: What Comes Next?

Here's a followup on the volatility theme, with a shout out to Paulo de Leon, whose comments on the postings are always insightful. What we're doing is looking at the open-to-close movement of SPY as a fraction of the day's high-low range. Very positive or very negative values show markets closing near their highs or lows for the day; values near zero indicate very little net movement on the day. The sample extends from March, 2003 to present (N = 777).

When the day's movement as a fraction of the day's range has been within plus or minus 10% (N = 80), the next three days in SPY have averaged .33% (48 up, 32 down). This compares favorably with the average three-day gain for the sample overall (.18%; 455 up, 322 down).

When I broke down the low net movement days in half based upon the day's volatility (range), however, a pattern emerged. When the market was volatile but closed near its open (N = 40), the next three days averaged a gain of .56% (27 up, 13 down). When the market was nonvolatile and closed near its open, the next three days averaged a gain of only .09% (21 up, 19 down).

Flat performances on the day thus have a different meaning based on the day's volatility. Non-volatile markets that are flat from open to close appear to lead to subnormal returns in the near term. Flat but volatile markets have much more bullish near-term prospects.