Daily Commentary - Posted on Monday, January 10, 2011, 11:33 PM GMT +1
Three Lower Closes but Improving …
Despite the fact that the S&P 500 closed modestly lower on Friday, January 7 (release of the BLS Employment Situation Report) and on Monday, January 10 (the third consecutive lower close), the index finished the first week of the year in a strong fashion, now up six weeks in a row.
In addition: the S&P 500 has been up (≥ +1.0%) month-to-date during all of the first five sessions of the year, posted a 1-year (52-week) high at least once during one of the first five sessions of the year, and closed above the previous year’s high on all of the first five sessions of the year as well.
Although the intermediate- and long-term outlook (with respect to 2011) is positive (see The Third Year of the Presidential Cycle, A Perfect (Bullish) Score, if …, Will Too Many Bulls Really Make a Bear ?), the market could be due to some profit taking and a pullback over the remainder of the month, at least with respect to the setup listed below.
Table I below shows all occurrences (since 1900), the S&P 500‘s performance over the remainder of January (assumed one went long on close of the 5th sessions and went into cash again on close of the last session of January, means returns over the course of the first five sessions are excluded from monthly returns), the number of sessions (position held), and the business day (of the month) where the S&P 500 had posted it’s highest and lowest level of the month in the event the S&P 500 had been up month-to-date during all of the first five sessions of a year in the past.
When the S&P 500 had been up month-to-date during all of the first five sessions of a year in the past, …
- … the S&P 500 closed at a (partly significantly) lower level at the end of January on the most recent 6 occurrences, and
- … closed lower at least -2.0% at some time over the remainder of the month on the last 7 occurrences, but
- … on the positive side the index posted it’s highest level of the month on any of the first five sessions on only 3 out of 24 occurrences ; so there is a good chance that we’ll get at least one higher close over the remainder of the month.
But this (negative) setup might collide with positive seasonalities like the third year of the presidential cycle, among others (and a positive outlook for January).
The latter (looking for at least one higher close above last Friday’s close) fits into the positive setup which was triggered on close of Monday, January 10: The S&P 500 closed lower three sessions in a row, but the close steadily improving concerning its respective intraday level (e.g. closing in the top quartile of the daily intraday range on the third session, in the third quartile on the second session, and below the midpoint on the first session), indicating that buyers are more and more getting the upper hand during the second part of the respective sessions.
Table II below shows all occurrences (since 1929) and the S&P 500‘s performance over the course of the then following 1 , 2 and 3 sessions, assumed one went long on close of a session where the setup mentioned above had been triggered in the past.
When the setup had been triggered in the past, …
- … the S&P 500 closed higher the next day on 13 out of the last 16 occurrences,
- … the S&P 500 closed at a higher level three sessions later on 27 out of 35 occurrences (or 77.14% of the time),
- … the S&P 500 never looked back and did not post a single close below the trigger day’s close over the course of the then following three sessions on 17 out of 35 occurrences (or almost 50% of the time), and
- … posted a median gain of +0.71% two sessions later, being up +1.0% or more on 12 while being lower -1.0% or more on only 3 occurrences.
Although historical probabilities and odds are tilt in favor of some profit-taking and a pullback over the remainder of the month (but being in conflict with positive seasonalities), there is a good chance that a pullback – if any – might start from a higher level at or around the end of this week.
Disclosure: No position in the securities mentioned in this post at time of writing.
Remarks: Due to their conceptual scope – and if not explicitly stated otherwise – , all models/setups/strategies do not account for slippage, fees and transaction costs, do not account for return on cash and/or interest on margin, do not use position sizing (e.g. Kelly, optimal f) – they’re always ‘all in‘ – , do not use leverage (e.g. leveraged ETFs), do not utilize any kind of abnormal market filter (e.g. during market phases with extremely elevated volatility), do not use intraday buy/sell stops (end-of-day prices only), and models/setups/strategies are not ‘adaptive‘ (do not adjust to the ongoing changes in market conditions like bull and bear markets).
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