Exploring Multi-day Stock Market Runs

16Apr09

It has felt like, at least to me, that the last half year or so has brought an increase in what I’ll call multi-day runs in the stock market. What I mean is long grinding moves of either consecutive up or down days without a break. These type of relentless assaults can wreak havoc on very short-term mean-reversion strategies such as extreme RSI(2) or adaptive daily-follow through.

In this report I want to look at these multi-day runs and whether they are becoming (a) more frequent, (b) stronger, or (c) longer/shorter in length.

Question #1: Are Multi-day Runs Becoming More Frequent?

2009041601

I’m defining a multi-day run as any move of two days or more in a single direction on the S&P 500. I’ve looked at longer duration moves as well (such as a minimum of 3 days or 4 days in a single direction), but the conclusions are more or less the same.

The graph above shows the rolling 1-year number of occurrences of multi-day runs, both up and down, from 1955, and shows that no, multi-day runs are not any more common today than they’ve been over the last 50+ years.

Question #2: Are Multi-day Runs Becoming Stronger?

2009041602

The graph above shows the rolling 5-year average percentage change of multi-day runs up (green) and down (red) from 1955. Yes, one could say that there has been an increase in the strength of multi-day runs recently (i.e. the red and green lines flare out at right side of graph) however, that would only tell part of the story.

The next graph shows the same data in blue, but here we’re looking at the average absolute % change of all runs (i.e. we removed the +/- sign) and comparing it to the standard deviation of all daily changes (multi-day run or not) in red.

2009041603

Note how the two lines track each other almost perfectly. Clearly, if multi-day runs are becoming stronger, it is simply a result of an increase in broader market volatility.

Question #3: Are Multi-day Runs Becoming Longer/Shorter?

20090416041

The graph above shows the rolling 5-year average length (in days) of all multi-day runs (blue), runs up (green), and runs down (red) from 1955.

Although the observation isn’t crisp, and it’s difficult to draw a strong conclusion, it does appear that multi-day runs have become shorter over the last 30+ years, from a high of 3.5 days in the early 1970’s, to about 2.9 days today.

Putting it All Together

Putting all of our observations together we get:

Multi-day runs are not any more frequent today than they have been over the last 50+ years. They have become stronger more recently, but this is simply a result of an increase in overall market volatility. They have, possibly, become shorter in length over the last 30+ years, meaning changes in price have become a bit more violent (because they are squeezed into a shorter amount of time).

Not what I expected to find, but I call em’ like I see em’…

Happy Trading,
ms

 

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2 Responses to “Exploring Multi-day Stock Market Runs”

  1. 1 Blue cat

    Very interesting exploration. Thanks for sharing them. These results should make a mean reversion strategy more rather than less successful. One approach that has seemed to work quite well over the past few months has been to look at the McClellan oscillator (http://stockcharts.com/h-sc/ui?s=%24NYMO). Although not perfect (what is?) readings outside +/-60 tend to prediction reversals. This is similar to (perhaps somewhat better than) using a very short range RSI (e.g., 2) for the same purpose and in the same way (http://stockcharts.com/h-sc/ui?s=$SPX&p=D&b=5&g=0&id=p81822235740).

    • 2 marketsci

      RE to Russ: McClellan as you’ve defined it on the todo list – thanks for that. michael


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