Friday, July 17, 2009

Four Consecutive Day of Consistent Strength: What Has The Next Day Brought?

With the recent market rally, we have seen four consecutive days in the S&P 500 Index (SPY) in which we have had higher highs, higher lows, and higher closes. That is consistent strength.

Going back to 2000, we have had 39 such four-day periods of consistent strength. Interestingly, the next day in SPY has averaged a gain of .21% (22 up, 17 down). By contrast, the average next day change in SPY for the remainder of the sample has been -.01% (1174 up, 1177 down). While this is not a barnstorming edge to the upside, it certainly suggests that, over this time, there has been no bearish edge to selling into consistent strength.

I've noticed among traders a tendency to try to sell this rising market. Sometimes it's because the traders are locked into a negative longer-term market view; sometimes it's because they've missed the upside and now are looking to make up for it by calling the next turn. I find historical analyses such as the above a nice mental caution light that allows me to check my assumptions and expectations.