There Is Nothing Unusual About The Latest (Sharp) Rally

Includes: DIA, IWM, QQQ, SPY
by: Duru


The WSJ recently created a list of 100-point milestones that makes the current rally seem remarkable.

When (properly) examined using percentages, this rally is not unusual at all.

It turns out these (sharp) rallies are relatively common since 1950, including 354 periods delivering gains at least as large as the current one in the same number of days.

The S&P 500 (NYSEARCA:SPY) has been one stubborn index. Despite so many possible catalysts to deliver for the bears, the index has bounced back from every concern. This is of course what it means to trade at all-time highs.

I can understand the angst because THIS was supposed to be the year of a 10% correction, long overdue following an incredible 2013. I was prepared for this pullback for months. Yet, the S&P 500 did not come close to delivering. Now, on the heels of a steep drop into oversold conditions, the current rally feels particularly stretched. According to the indicator I watch most, at 59.9%, the percentage of stocks trading above their 40-day moving averages (DMAs), the stock market is not quite overbought yet.

One piece I noticed that made rounds related to the supposed remarkable "speed" of the current gains came from the Wall Street Journal's MoneyBeat. In an article amply titled "A Timeline of S&P 500 Milestones," the WSJ noted:

"The S&P 500 has gone 65 trading days since it first finished above 1900 in May. Assuming the S&P 500 closes above 2000 on Tuesday, it would mark the fourth quickest 100-point move in the index's history, according to WSJ Market Data Group.

The second-longest time frame that spanned 100-point moves came from 2000 through 2013, when the index needed 3,298 trading days to go to 1600 from 1500. Of course that period included two major bear markets during the bursting of the tech bubble and the financial crisis."

I have become accustomed to people talking about points on the Dow Jones Industrial Average (NYSEARCA:DIA) without considering percentage moves, but this piece was one of those rare moments the S&P 500 was made to suffer for points over percentages. It turns out that the recent move is not unusual at all when observed with the proper lens of percentages…even after greatly shortening the time frame for the recent gains.

The bulk of the S&P 500′s 100-point gain since the first finish above 1900 in May has come in just 13 trading days. On August 7, 2014, the S&P 500 closed at 1909.57. On August 26, 2014, the index closed at 2002.02. Over the 13 trading-day rally, the S&P 500 gained 92.45 points for a 4.7% gain. Since 1950 and through August 1, 2014, there have been a total of 1,148 trading days where the 13-day gain was at least 4.7%. This is out of a total 16,237 trading days - a non-trivial 7.1% of the time. The highest 13-day gains occurred in 2008 and 2009 with gains ranging from 18.1% to 23.1%. There have been 79 trading days with double-digit 13-day gains.

We can break this down further by only counting continuous periods instead of total trading days. In other words, if the S&P 500 has gained at least 4.7% over 13 trading days for four days straight and then on the fifth day it drops to a 3% 13-day gain, I count one continuous period. Using this method of counting, the S&P 500 has delivered 354 such periods, not including the current one. Since 2010, there have been 35 of these periods.

So, it turns out the current sharp gains are not unusual at all. Instead, it is more likely that the sharp drop that preceded this current rally makes these gains appear unusual.

This was a relatively easy analysis. For those interested in reviewing the numbers, I have posted the spreeadsheet for you to download. I am interested in any feedback.

And the beat goes on for the SPDR S&P 500


Be careful out there!

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.