Wednesday, September 22, 2004

As today's price action in the broader market certainly looked like it could have longer-term implications, I took a look at past instances when the S&P put in a similar performance.  Specifically, I looked at all times since 1962 when the S&P set a new 21-day high yesterday, but today closed lower than the prior 10 days' lows.  The results were interesting... Out of the 42-year period I studied, such a pattern has occurred only six times, the last one being on 1/4/00.  Right off the bat, it should be noted that six occurrences does not give us any kind of statistically valid sample.  Nevertheless, out of the 6 instances, the S&P recovered enough to exceed the prior high only once within the next 10 days, but it managed to do so 3 times within the next 21 days.  The average close the next day was neutral, with 50% of them closing positively and the average return equaling 0.1%.  After 10 days, the S&P was higher 2 times and the average return was 0.7%.  However, after 90 days the index was higher every time, with an average return of over 7%.  It did not make any difference if the volume was higher or not on a day like today. Overall, quite frankly the results are more positive than I thought they would be.  There was some weakness in the short-term, but it wasn't very pronounced.  It is notable to me that the market went on to new highs within 90 days every time, suggesting whatever weakness we do see going forward could be temporary.  Also notable I think is the fact that only once did the S&P exceed the prior highs within 10 days, telling us that most often it struggled or made minimal upside progress in the two weeks following such a pattern. One other thing I looked at was the amount of bullish sentiment displayed at the time, using the Investor's Intelligence survey.  Today's occurrence happened while we have the 2nd-highest amount of bullishness, with the occurrence on 1/9/86 being the only one that was higher.  After 10 days, the S&P on that occurrence was lower by nearly 1%, but recovered not long after that. In case you are interested, here are the other dates that popped up:  9/26/63, 1/9/86, 5/8/89, 11/15/91, 7/20/99, 1/4/00. 9:46:30 PM