What happens after the runup?
Monday’s market was notable for the fact that we registered 1432 new 65-day
highs across the NYSE, NASDAQ, and AMEX exchanges against only 110 new 65-day
lows. To give you an idea of how rare that is, consider that, since March,
2003, we’ve only had 26 days out of 703 in which new 65-day highs exceeded 1400.
For so many stocks to hit new highs simultaneously requires a broad and
strong uptrend. I decided to examine those occasions and see what we might
expect over the following two weeks (ten trading sessions) on SPY, the Standard
and Poor’s 500 Index exchange traded fund.
What I noticed was interesting. Half of the 26 occasions occurred
between March, 2003 and June, 2003–the very start of the bull market.
Following those occasions, the average maximum gain over the next ten days
(i.e., the move to the highest high of the next ten days) was 3.49% and the
average maximum loss over the next ten days (i.e., the move to the lowest low of
the next ten days) was -1.70%. The average price change ten days following
the strong reading was 1.77% (10 occasions up, 3 down). This is much
stronger than the average ten-day gain of .63% for the entire period of March,
2003 – present (437 up, 265 down, 1 unchanged)
Since June, 2003, however, it’s been a different story. Following the
occasions when we’ve had more than 1400 new 65-day highs, the market has
averaged a gain of only .11% (7 up, 6 down) over the next ten days–clearly a
subnormal performance. A look at the average maximum upside and downside
moves over those next ten days tells the story: the market averaged a maximum
gain of only 1.27% and averaged a maximum loss of -1.41%.
What does this mean? It means that, since June of 2003, we’ve had
limited upside potential following periods of broad strength and a subnormal two
weeks of market performance. Early in the bull market, strength led to
further strength and we had long runs of days with over 1000 new 65 day
highs. Later in the bull market, those runs have been brief and just as
likely to be followed by price reversals as continuation.
My best hunch tells me that this is a function of aging bull markets: as we
begin topping out, strength is no longer followed by vigorous strength over the
intermediate term. Should we fail to follow through on the first week of
January’s strength, I will take it as yet another sign that the bull has seen
his best days.
Brett N. Steenbarger, Ph.D. is Associate Clinical
Professor of Psychiatry and Behavioral Sciences at SUNY Upstate Medical
University in Syracuse, NY and author of The
Psychology of Trading (Wiley, 2003). As Director of Trader Development
for Kingstree Trading, LLC in Chicago, he has mentored numerous professional
traders and coordinated a training program for traders. An active trader of the
stock indexes, Brett utilizes statistically-based pattern recognition for
intraday trading. Brett does not offer commercial services to traders, but
maintains an archive of articles and a trading blog at www.brettsteenbarger.com
and a blog of market analytics at www.traderfeed.blogspot.com.
He is currently writing a book on the topics of trader development and the
enhancement of trader performance.