More Time Needed Before High-Odds "Go"

Bottom Line: The market has been stuck in a range, yes, but it is not entirely unusual. From the looks of the past 100 years, there should be a few more months to go before we hit another yearly extreme.

Much has been made of the extended trading range we’ve seen this year, and it is a popular choice for questions I receive. It’s no wonder - we’ve now gone 103 days since the Dow Jones Industrial Average hit either a new 52-week high or 52-week low (actually, I’m using 252 trading days, but they are essentially the same).

While this is a relatively long streak, there have been 69 other streaks that have been longer since 1897. Once those streaks hit 103 days, they went on to tack on an average of 82 more trading days – nearly four more months before hitting a new yearly high OR new yearly low. The standard deviation was 60 days, which means that most of the occurrences (about 68%) went between 22 and 142 additional days.

Over the past 107 years, there have been 10 occurrences of the Dow going more than 252 days – an average year – before seeing a new yearly high or low, with the longest streak being 360 consecutive days which ended in February 1980. 28 of the 69 streaks lasted more than 200 days.

What we’ve seen so far this year is relatively unusual, but it is by no means unprecedented. Of course, looking at past statistics only does as much good as it helps us determine what is most likely to happen going forward. These stats would suggest that there is a good chance we will not see a new 52-week high or 52-week low in the Dow for at least several more months, though there was no real directional bias to the past data – meaning sometimes the range was broken to the upside, sometimes to the downside. Specifically, the trading range was ended by a new yearly high 45 out of the 69 times, and 24 times it was ended by a new low. That 65% “win” rate for the bulls, however, is more likely due simply to the upward trend in prices over the past 100 years than it is some inherent quality about trading ranges.

However, we may be able to glean a little more insight about the resolution of the trading ranges if we look at what the market was doing prior to when it entered the range in the first place. The table below outlines what the Dow was doing prior to when it entered the range, and the percentage of time that lead to the range being resolved with a new high or a new low:

Resolution of Extended Trading Ranges At least 103 days w/o new 52-high or 52-week low DJIA, 1897 - 2004
	Resolved with New High	Resolved with New Low
Market hit new highs prior to range…	42%	58%
Market hit new lows prior to range…	58%	42%

These are fairly interesting results. We can see that when the market was hitting new highs, then entered an extended trading range, more often than not it ended its trading range by making a new 52-week low. Contrast that to when the market was hitting new lows prior to entering a trading range – those were most often resolved by the market ending its range by hitting new yearly highs.

This may be somewhat counter-intuitive. You would expect that if the market was hitting new highs, and then consolidated those gains for an extended period of time, that it would eventually break out to the upside. While the differences aren’t exceptional, those expectations aren’t justified, as the market most often broke out of the range in the opposite direction it was going prior to entering it. I don’t think these odds are nearly strong enough to suggest that our current range will be resolved to the downside, but one takeaway at least should be that we shouldn’t expect this range to be resolved any time soon. Oscillators should continue to out-perform breakout strategies.

Bottom Line: Tomorrow will have one of the strongest historical biases in its favor on the long side out of any other day of the year.

Something of a statistical oddity will be watched by traders tomorrow, and that is the unusually positive bias that the day has shown historically. As is posted to the Daily Overview page each day, using S&P 500 data from 1950 – 2003, July 14^th has been positive 78% of the time, with an average return of 0.29%.

Since the 14^th will sometimes fall on a weekend, we can also look at the data in terms of what trading day of the month it is. Looked at that way, tomorrow will be the 9^th trading day of the month. Using the data available on the site, we can quickly see that the 9^th trading day in July has been positive 72% of the time, with an average return of 0.3%. To see this data for each day, simply click on the Seasonality link on the site, then click on the “Data” link next to Performance by Day of Month. The window that pops up will present you with a sortable table with this information for every trading day of the year. Also on the Seasonality page, you can see data for trading days of the year (instead of trading days of the month), or for specific dates (i.e. July 14^th as opposed to the 9^th trading day in July). Of course, there is also month seasonality data and other items that may be of interest as well.

Over the past 20 years, the 9^th trading day in July has been positive 16 times, for a “win” rate of 80%, and an average return of 0.3%. Since 1987, that day had been positive every year except for 1995 (a loss of 0.2%) and 2002 (a loss of 0.6%). I’m not sure if there is some structural quality about that day (perhaps its proximity to option expiration), but its consistent positive quality is on a par with days normally associated with well-known holidays. In fact, as we can also see from the data on the site, the 9^th day in July is the third-most positive day (in terms of percentage of time positive), behind only the last trading day in August and the second trading day in January. I always say that I treat seasonal tendencies like having a gentle wind for or against you – nothing more – so perhaps the bulls will find it a tad easier to make money tomorrow. But even though the historical odds may be in their favor, I most certainly wouldn’t use it as an excuse for a trade in and of itself.

Bottom Line: A “fringe” sentiment survey showed a marked decline in bullish sentiment, though more time is needed before saying that these traders truly have a bearish mentality.

The lowrisk.com sentiment survey came out with its most recent results today, covering responses through this past Sunday. In a rather stunning about-face, bulls dropped from 61% of respondents down to 19%, while bears doubled from 28% to 56%. This level of bearishness is fairly extreme, as it ranks 22^nd out of the 376 readings since 1997. The last time the bulls were pulled so far into their shells was March 12^th, and historically the Dow Jones Average was up 71% of the time four weeks later with an average return approaching 2% when bearishness was so pervasive.

Also interesting is that the respondents on average guessed that the DJIA would close at 10,019 this Friday, a decline of 1.9% from where the Dow was trading last Friday. This is the largest expected decline since the respondents guessed the Dow would be 2.2% lower the week of March 29^th (instead, the index tacked on a 2.5% gain). Overall, there is no correlation between the guesses and future performance, so it is difficult to use this data on a weekly basis, but when the guesses are extreme, we many times are near a turning point. The current guesses are not quite low enough to be qualified as “extreme”, but I think it is notable given that it is the 2^nd-widest discrepancy we’ve seen this year.

While this kind of bearishness is certainly a good sign, we need to see more of it – after all, a four-week average of this data shows bullishness still rampant. One week is not enough to turn that around.

Today we saw one of the narrowest ranges (high to low) in the S&P 500 in its history, especially when holidays are excluded. In fact, we would have to go back 8 years to see a narrower-range non-holiday day (expressed in terms of price level at the time). Looking at what past extreme narrow-range days meant going forward, it’s difficult to discern much of anything. While a common refrain is that low volatility begets high volatility, and in a general sense I believe that to be true, the day following an extreme narrow-range day also tended to see a range below normal. Today’s tight trading was unusual, but similar days have not necessarily lead to anything consistent.

In the short-term, our intraday measures ended the day mixed, with a few overbought, a few oversold but mostly they are in neutral. While I would much prefer to have a better confluence of oversold readings, if the INTC news is enough to get us to gap down significantly, I would consider going long Nasdaq futures (or a proxy) if they gap open below 1421 and are able to reverse above that level early. This is a fairly weak trade, since we don’t have a whole lot of negativity at the moment, so if it occurs position sizes would be reduced.

Longer-term, I will repeat what I said last week…since late January, my contention has been that we would see a prolonged period of a trading-range market, one in which using oscillators and buying oversold conditions while selling overbought ones would outperform trend-following, breakout-type strategies. I see nothing so far to change that view, and I continue to believe that once we see a confluence of oversold readings from the current decline, it will once again be time to shift back to the long side. We’re starting to see a few of those signs pop up now, but we certainly don’t have a confluence such as we had in March or May. We could of course rebound at any moment, but it likely won’t pay to become aggressive until more measures line up.

This disclosure is not intended as trading advice in any form. It is meant as a note to subscribers that the author may have a position directly affected by the market outlook reflected in the commentary. Although the author takes great pains to remain objective in any commentaries, it is only fair that readers should know that the author may have taken positions in accordance with his market outlook. Positions can and do change at any time, without notice to the reader.