Wednesday, September 24, 2008

Relative Range Expansion in the S&P 500 Index

I noticed that the average daily range for the S&P 500 Index (SPY) over the past week has been quite elevated compared with its norm. So I took a ratio of the average five-day high-low range and expressed it as a percentage of the average 50-day high low range. During the last week, the average range for SPY has been twice its 50-day average.

Since 2000, we've only seen 43 occasions in which the average five-day range in SPY has exceeded the average 50-day range by 75% or more. Interestingly, those occasions included some major periods of market turmoil--and some major intermediate-term market bottoms, including September, 2001; July, 2002; March, 2007; July/August, 2007; and January, 2008.

Twenty days after the spike in relative range, SPY averaged a 20-day gain of 3.17% (34 up, 9 down), much stronger than the average 20-day loss of -.74% for the remainder of the sample. When the five-day range was less than 75% of the 50-day range since 2000 (N = 333), the next 20 days in SPY have averaged a loss of -1.95%. It appears that relatively quiet markets have offered quite a bit less upside opportunity than markets in turmoil.
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3 comments:

abel said...

The trading action the past couple weeks reminds me of the period directly following the 2000 market top.

Interesting it is now occuring at what may be considered (hopefully) a market bottom.

On a longer term chart, it may appear that the period referenced was not that volatile, but it surely was!

Firebird said...

Yes, actually the daily ATR-14 is at an all-time high (point-wise).

Best trading,

Jorge

Brett Steenbarger, Ph.D. said...

Hi Abel and Jorge,

Very interesting observations! Thanks--

Brett