Saturday, May 13, 2006

Two Consecutive Broad Declines: What Comes Next

We had two consecutive days on Thursday and Friday in which 70% or more of traded issues declined on the day. Since 1990 (N = 4124 trading days), that has only occurred 13 times.

The next day, the S&P 500 Index ($SPX) was up by an average .59% (9 up, 4 down)--much stronger than the average daily gain of .04% (2174 up, 1950 down) for the sample overall.

Two days later, the S&P was up by an average 1.37% (10 up, 3 down)--considerably stronger than the average two-day gain of .08% (2209 up, 1915 down) for the 1990-2006 sample.

What that tells us is that two consecutive down days of very negative breadth is a rare occurrence. It is also interesting that 7 of the 13 next day occurrences led to price changes of greater than 1%, suggesting that volatility follows broad two-day declines. Looks like it might be worth looking for buying setups on Monday and watching for a carryover of volatile action.

4 comments:

Brian Shannon said...

Brett, I have enjoyed your book and visit your site regularly. You are probably one of the hardest working people in this business, great work. My question is where do you come up with the data for these types of studies, is it TS? or some other program?
Thanks, Brian

Brett Steenbarger, Ph.D. said...

Thanks for the note, Brian; it's much appreciated. I use data from a variety of sources, including Pinnacle Data (www.pinnacledata.com); Townsend RealTick; and e-Signal. The vast majority of my studies are done in Excel.

Brett

vimpy said...

Does this post contradict the one you posted:
Big Drop, Little Fear: What It Means http://traderfeed.blogspot.com/2006/05/big-drop-little-fear-what-it-means.html

Which is a better indicator VIX or put/call. Any comments would be appreciated
Thanks

Brett Steenbarger, Ph.D. said...

Thanks for your great question. Comparing VIX and Put/Call is a very good idea for a future article, and I'll see if I can tackle it shortly.

My sense, FWIW, is that the big edges are at the indicator extremes, whether for VIX or put/call. Large declines give the greatest upside edge when accompanied either by distinctive lack of pessimism or by extreme pessimism.

Clearly, this could benefit from additional investigation. Thanks for the prod!

Brett