Why this week’s action in the Dow is important
Like Barbaro, the Dow stumbled out of the gate on Monday, only to end the
week in the winner’s circle, undefeated for the fifth consecutive week. On
my research site, TraderFeed, I took a historical look at what happens to the
Dow after it has risen for five straight weeks. What I found was no Triple
Crown: since 1978, the average change over the next five weeks was only .02% (39
up, 30 down). That is much weaker than the average five-week gain of 1.03%
for the sample overall (N = 1474 weeks; 910 up, 564 down).
It’s rare to get five weeks down in a row on the Dow–only 24
occasions since 1978–but the results are interesting. Five weeks later,
the Dow was up by an average 2.0% (18 up, 6 down), much stronger than average.
At a recent seminar in Chicago sponsored by
optionsXpress, I had the pleasure of meeting Steve Primo. His message to the
group was straightforward: When it comes to trading, betting the favorite
seems to lose you money. Returns are better after the market has been down
for a while. Betting the Dow after five losing weeks in a row has
outperformed betting the Dow after five straight winners.
But forget about the next five weeks, you say; how should we bet the next
race?
After the Dow has risen for five straight weeks, the next week in the Dow has
averaged a loss of -.24% (28 up, 31 down), considerably weaker than the average
one-week change of .20% (846 up, 628 down) for the sample overall. No
bullish edge there. Indeed, the Dow has been down the week following five
straight up weeks three of the four times that has occurred since 2004.
What I found in my blog research, however, was that bullish runs of five
consecutive rising weeks were much more likely to result in bullish next
five-week periods during bull markets than bear ones. Friday’s market
opened above our recent trading range and stayed there all session long. A
return to that range will have me thinking that the bull market is tiring.
Broad follow-through to the strength, however, will take this market to the
Preakness.
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.
His book, Enhancing Trader Development, is due for publication this fall
(Wiley).