Tuesday, February 17, 2009

Facts About Chasing Market Momentum

Since the start of '08, the S&P has declined by 43%. Yet, if you only held the market on days following a down day, you would have earned a cumulative return of 36%. In contrast, if you only held the market on days following an up day, the cumulative return would have been -58%. In terms of daily (close-to-close) returns, the average return since the start of '08 following down days has been 0.28% while the average return following up days has been -0.62%.

Since Oct, this pattern has become even more pronounced: the average daily return following down days has been 0.24% compared to -1.06% following up days.

And despite the stabilization in equity markets over the past two months, the anomaly has only increased. Since Dec 1, the avg return following down days has been 1.15% compared to -1.24% following up days.

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C. Fischer said...

Without crunching the numbers, this seems like its effect is magnified even further by the degree of the prior up or down day.. Big down days seem to more often produce a modest up day the next..

Guru said...

I read these and other similar stats for years (remember the stat about how much you lose if you time the market and miss big up days -- no talk ever about the gains of missing the biggest down days).

But your headline is even more off base. There's nothing here to hint at "momentum". Momentum can only have meaning (be researched or played) when spoken in terms of "trend" and "trend" is only meaningful in the context of weeks, months or even years. A single days trading has only something marginally to do with "momentum".

Anonymous said...

I wonder how the results would be if you only invested after two consecutive down days.

Wish I had an easy way to test that sort of thing.

Anonymous said...

How did you come to the 36% stat? I downloaded the past years historical data for the S&P and I show that investing the day after a negative day would have returned 17% not 36% - I'm wondering what we did different.