Monday, May 10, 2010

The S&P Rollercoaster; But Do Shorts Have The Most to Gain From Monday?

With the long awaited return of volatility, last week to the downside and Monday's action sharply to the upside has left markets in a state of confusion. Can anything be learnt from similar events in the past?

For this I will look at short-term correlations, in particular the relative position of price to 3-day, 5-day and 9-day SMAs (versus my more traditional 20-day, 50-day and 200-day SMAs) and the performance of the  S&P over the following 10 days.  

Friday saw the S&P closed 5.2% off its 9-day MA, 3.9% off its 5-day MA and 2.1% off its 3-day MA.

The next match was on March 6th 2009 and a period of three days for 18th, 19th and 20th of Febaruary 2009. The subsequent reactions given their proximity were stark - one sharply up, the other sharply down.

January 15th 2009 was the next match at 5.1% off its 9-day, 2.3% off its 5-day and 1.1% off its 3-day. In the subsequent 10 days it swung 2.4% above and below its 841 close, but finished after 10-days at 845.

The next series of matches was on November 21st 2008, November 17th 2008, October 22nd 2008 and October 3rd 2008. Here the score was two up, one flat and one down.

The next round of matches was in 2000, with isolated cases in 2003 and 1998; three of those cases saw a higher close 10 days later with only 2003 finishing lower.

From there it's a huge step back in time. The next record is December 1987 (rally) and September 1986 (flat - but not before another big loss day).
Before another big step back to a cluster of matches in 1974; two matches closed higher after ten days, one lower and one finished flat.

The last set of occurrences were in May 1962 (flat) and  September 1955 (flat).

If we were to look at the relevant performance of the S&P across the 10 days relative to the start day (for all matches) a slightly different picture emerges.

After the sharp reaction down the S&P typically follows with an 1% gain on average. For the next five days the S&P is able to hold onto this gain before falling back to its starting point.

The picture is a little more stark for median values; here the second day is the strongest day with a 3.6% push higher (which may be similar to what the market does today). But from there it's a steady loss until 8 days after the match where the median return is 1.0% below the start date. 

So far, Monday's reaction to Friday's close is stronger than both average and median behaviour in the past. The likelihood here is that we will see a return back to Friday's closing level within the next ten days. At that point the dust will have settled somewhat and we will have a better idea as to the roadmap ahead.

Given this - shorts may have the most to play for off today's gains.

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