Momentum signals: One-day rallies

There are big up days, and then there are big up days.

Thursday was certainly one of them. Following a milder-than-expected inflation reading from the Consumer Price Index (CPI), the S&P 500 (SPX) jumped 5.5%—its biggest one-day rally since April 2020:

Although the SPX has gained more than it did on Thursday only 20 times since 1983, the chart shows there have been several unusually large up days recently. The SPX’s average up day over the past 40 years is 0.74%, but there have been six days since the beginning of October that the SPX has gained at least three times that much.

Is yesterday’s momentum likely to continue? It’s one thing to note that short-term, high-momentum price moves sometimes reverse in the near term. But aside from the fact that this handful of examples shows that isn’t always the case, digging into the details can provide a better understanding of short-term market mechanics.

The following table shows the SPX’s median returns after one-day rallies ranging from 1%-2% to 5%-6%. To get a feel for how these moves stack up against the market’s typical performance, the bottom row shows the SPX’s median returns for all one-day, one-week, and two-week periods: ¹

Although there were very few 5%-6% rallies, the table has an obvious trend: The bigger the one-day rally, the more the market tended to underperform or pull back in the near term. For example, after 4%-5% up days, the SPX had negative median returns after one day, one week and two weeks (although the typical loss was smaller after one or two weeks than it was after one day).

On the other hand, 3%-4% rallies appeared to represent a sweet spot, at least in terms of the market’s performance after two weeks—the SPX’s median gain was 1.35%, which is more than twice the size of its typical two-week return (0.63%).

It’s important to remember these figures are snapshots of the market’s performance over the two weeks—they don’t have any longer-term implications. Also, the recent examples on the SPX chart show how much results can vary from case to case. But they’re a reminder that the market tends to adjust (and readjust) after high-momentum moves—a bit of knowledge that can benefit both traders and investors.

Today’s numbers include (all times ET): Consumer Sentiment (10 a.m.).

Today’s earnings include: Dice Therapeutics (DICE).

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¹ All figures based on S&P 500 (SPX) daily price data, 12/31/82–11/10/22. Each percentage range includes all moves greater than or equal to the lower boundary of the range and less than the upper boundary—e.g., “2%–3%” means “greater than or equal to 2%, but less than 3%.” “One week” and “two week” refers to periods of five trading days and 10 trading days, respectively. Supporting document available upon request.