A Study in SPX Price Momentum

The NYSE experienced a low volume session today.  Among the factors responsible for this could be:

  • Chinese New Year (China’s markets are closed all week)
  • NEMO (effects of which still linger)
  • State of the Union Address (Tuesday)
  • VIX expiration (Wednesday)
  • Less demand for equities at this level

What might be a more accurate phrasing for that last bullet point is:

  • Hesitation and/or uncertainty about short-term direction

The SPX rose for six consecutive weeks (as of last Friday).  Going back to 1957, there have been 93 other occurrences in which the S&P 500 Index rose 6 consecutive weeks or more.  The results of which are slightly positive.

Over the course of the next two weeks (following six consecutive weeks of price gains), the SPX:

  • Increased 60% of the time (56 occasions)
  • Gained an average of 0.59%
  • At worst, returned -2.91%
  • At best, returned 4.74%

Over the course of the next four weeks (following six consecutive weeks of price gains), the SPX:

  • Increased 68% of the time (62 occasions)
  • Gained an average of 0.96%
  • At worst, returned -6.99%
  • At best, returned 6.87%

Over the course of the next 13 weeks (following six consecutive weeks of price gains), the SPX:

  • Increased 71% of the time (66 occasions)
  • Gained an average of 2.64%
  • At worst, returned -9.84%
  • At best, returned 12.68%

In relation to those 93 prior occurrences, the return over the past six weeks has been slightly more positive than average; 8.24% compared with an average 6.96%.  While the possibility of outcomes is, as always, wide and every situation unique, history suggests (on average) a limited upside from here in the near term–one to two percent.  I expressed this likelihood last week.

I’m not suggesting equities are extremely overbought at this point; mainly because this sort of sustained momentum tends to feed on itself.  However, I also don’t think there are strong enough catalysts to propel equities to the high ends of historical ranges (i.e. the price study described above) without a minor correction (read:  better buying opportunity) first.

Much of the YTD gains (4.65%) came in the first 14 trading sessions of the year.  Over the last 14 trading sessions, gains are much more modest at 1.64%.  Whether this is a sign that equities are rolling over or just proceeding at a more realistic pace, what is apparent is that the rest of 2013 will not proceed with the same velocity and consistent upside as January.

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