Wednesday, July 26, 2006

When the Week Gets Off to a Bang

This week has gotten off to a bang, with rises on Monday and Tuesday providing us with more than a 2% gain in the Dow Jones Industrial Average. But what happens when the market starts the week with a bang? Do we get more fireworks later in the week or does the bang become a whimper?

I went back to December, 1988 (N = 4443 trading days) and found exactly 100 occasions in which the market was up on both Monday and Tuesday and had a total two-day gain of over 1.5%. Two days later, the Dow was down by an average -.21% (42 up, 58 down), which is much weaker than the average two-day gain of .08% (2384 up, 2059 down) for the entire sample.

Interestingly, we have not started the week with a bang at all up until now in 2006 and only had one occasion in 2005. Since the recent bull market began in March, 2003, we've had 12 starts to the week with a bang. Two days later, the market was up 5 times, down 7 for an average loss of -.13%.

Also interestingly, consecutive two-day gains which, together, produce a rise of more than 1.5% show somewhat subdued returns, but nothing as subnormal as the two-day "bang" gains at the start of a week. At least in recent market history, strong starts to the week have not produced strong finishes.