While today’s upturn combined with its magnitude -each of the three indices gained 1.65 percent- seems welcome, analysis of this +1/-1/+1 pattern in the past reveals the pessimistic side of this combination. Consider the distribution of the last 77 occurrences since January 2000 illustrated in today’s diagram.
Even though their frequency relative to the number of days in the up and down history of the S&P500 seems near constant, their average size seems inversely related to the trend of prices.
The average advance of 1.36 percent on the last day of this +1/-1/+1 combination in the 2000/2003 decline exceeds the .62 percent average in the following upturn. Similarly, in the comparison of the 2007/2009 bear market up to the present day, the mean 1.64 percent change in the falling market is larger than the current period’s 1.23 percent.
Such an inverse relationship surely is counter intuitive, yet if it does exist, then today’s large positive changes are not welcome: they could be precursors of a further correction in prices, not a sign of better times ahead.
DJIA 1.65 percent
NASDAQ 1.65 percent
S&P500 1.66 percent