Next time you’re at a party and you’re in the mood to really bore someone, share this market tidbit with them: “Since February 1988, the S&P 500’s average daily return has been 0.037%, and it has closed higher on 53.66% of the time.”
Although you’re probably likely to find yourself alone in a corner if that’s the extent of your cocktail party chitchat, such information can be more useful than you might think in understanding the stock market’s behavior and enhancing your trading skills. The past few days are a good case in point.
By Monday, the S&P 500 (SPX) had rallied some 9% off its February 9 low, hitting a three-week high. On Tuesday, though, the index closed down 1.27% (after pushing to a higher intraday high), likely worrying nervous bulls about an interruption of the market’s current rebound.
Here’s where more “boring” market stats come into play. Many short-term traders are familiar with the concept of momentum trading—essentially, buying hot markets with the expectation they will extend their moves in the near future. Given the choice, such traders would likely prefer to go long on the close of a day the market gained 1% or more vs. a day it lost 1% or more.
Get ready to be a more interesting party guest. The columns in the following chart represent the SPX’s average return the day after 1–2% up days vs. 1-2% down days over the past 30 years (the average return for all days is included for comparison):
Source: OptionsHouse (data)
That’s right, the average one-day return after a 1–2% up day was 0.044%—just a little more than the average return for all days—while the average return after 1–2% down days was 0.114%, nearly three times as much. The numbers near the top of each column, which represent the percentage of higher closes for each group, tell the same story: The SPX closed higher after 1–2% up days less often (50.61% of the time) than it did after 1–2% down days (56.22%). So, although it would hardly be a recommended trading strategy, if you had no other factors to consider, you’d be better off buying the SPX (via the E-Mini S&P 500 futures or some other proxy) on the close of a 1–2% down day rather than a 1–2% up day. Over time, the odds suggest you’d come out further ahead.
Dry stats, perhaps, when you consider them in isolation, but they can sometimes add up to bigger things when you start putting them together.
A calendar reminder: Today is the first trading day of March, which has had a fairly decent track record for bullishness since 1960, closing higher nearly 59% of the time, and closing above the open 60% of the time. Over the past 20 years it’s closed up 13 times (65%), and closed above the open 14 times (70%).