Are Three Consecutive 1% Moves by $SPX Significant? (Full Article)

By Lawrence G. McMillan

This article was originally featured in the 2/18/16 edition of The Option Strategist Newsletter.

In the past week, the Standard & Poors 500 Index ($SPX) had a huge rally.  Specifically, it rose by more than 1% for three consecutive days – for the first since October, 2011.  On the surface, it seems that this is a powerful move that should inspire further gains.  But I prefer to see hard facts, and so we ran the data on these types of moves.

Since 1950, there have been 31 such occurrences.  Three times there have been one percent moves for four days in a row, and once there was five days in a row.  Whether it was three, four, or five, it just counts as one occurrence for the purposes of this study.

In case you’re wondering, the five in a row occurred when the market was coming off the bottom of the 1969-1970 bear market.  The bottom had actually been put in, in July 1970, but there was a pullback in August.  From there the market turned higher and advanced by more than 1% on every trading day from August 18^th through August 24^th.  That was one of the more bullish occurrences, as $SPX continued to rally – rising 5% in a week, 10% in a month and a half, and 24% in six months (after the third day of 1% gains).

However, all the occurrences have not been nearly that bullish.  One of the worst was in early January 2009.  The market turned down with a vengeance, even after the strong 3-day move. $SPX lost 6.6% in a week, 13.6% in two weeks, and 22% in two months.  That brought $SPX to the lows of the 2007-2009 bear market, though, and another spate of three 1% days in a row occurred on April 2, 2009.  That one was bullish as it came right after the market lows.

The table on page 2 shows all of the signals.   Averaging them all together, there has been very little gain over the weeks following three days of rising 1% or more.  Eventually, there is a bullish bias, as the average gain is 4% after three months, 9% after six months, and 14.5% over the next year after the “signal.”  But is that really worthwhile information?  We rarely trade three-month positions, and almost never trade six- or 12-month positions.  Eventually, if one looks out far enough from any date, he is going to see the market has risen – for the market rises in general.

Still these statistics might be encouraging for those trying to think with a slightly longer-term horizon:

                        After three months: average gain = +4.01%;
                                                            Market rose: 21 times
                                                            Market fell: 10 times = 68% winners

                        After six months: average gain = +9.27%;
                                                            Market rose: 23 times
                                                            Market fell: 8 times = 74% winners

                        After one year: average gain = +14.53%;
                                                            Market rose: 26 times
                                                            Market fell: 5 times = 84% winners

Even that bad “signal” in January 2009 (which saw the market decline over 22% in the next two months) was a winner after a year (but not after three or six months).   One of the worst signals was in October, 2000.  For some reason, there was the 3-day rise of 1% each day, but it was more or less out of context, with a nasty bear market following for more than the next year.   Subsequent signals in March 2001, and April 2001 met with a similar, bearish fate.

The worst long-term signal, though, was the one in December 1973.  At that time, the market was coming off a deeply oversold condition, since it had been declining for most of the year.  The rally in December 1973 ran headlong into the first Oil Embargo, and then the devastating 1974 bear market that followed.  A year after that signal, the market was down 31.6%.  Note that there were two signals in October, 1974, at the eventual bottom of that bear market, but even then there wasn’t much gain until six months later.

So, I suppose that the purchase of some long-term call options (maybe even out-of-the-money) could be justified by this data.  However, it is worth noting that there can be times when the market does not respond bullishly after these periods of three or more consecutive daily rises of 1%. 

Complete record of dates when $SPX had risen by 1% or more on three consecutive days, and the subsequent $SPX percent moves over the next year.

 “Days” are “Trading Days”

The number following the date (19500702,3 for example) is the number of consecutive 1% daily gains.

This article was originally featured in the 2/18/16 edition of The Option Strategist Newsletter.