Dow Signal Suggests Roller Coaster Isn't Over

When all 30 Dow components end a session lower, there are bullish short-term implications

by Alex Eppstein

Published on Sep 10, 2015 at 11:07 AM

After spending most of the year range-bound, U.S. stocks broke south in mid-August, and since then it's been a wild ride. There's been a trend toward extreme moves -- when things are good, they're very good, and vice-versa -- though even a triple-digit gain can turn on a dime, as we witnessed yesterday. To illustrate this surge in volatility, and for a historical perspective, we enlisted the help of Schaeffer's Senior Quantitative Analyst Rocky White, who took a look at both the S&P 500 Index (SPX) and Dow Jones Industrial Average (DJIA).

Below, you'll find a daily chart showing the number of 2% (or more) moves the SPX has made within the past 21 sessions, dating back to 1990. As you can see, the broad-market bellwether has experienced seven swings of at least 2% over the last 21 trading days -- the highest number since 2011. 

150910spx2percentmoves

But, what about the Dow? Recently, we've seen a rash of instances when all 30 of its components move in unison. Yesterday, in fact, was the third time this month that all blue chips ended in the red, per the chart below. It was also the fifth time in three weeks. (Please note, this accounts strictly for current Dow stocks; the data does not consider the occasional shifts in these components.)

150910dowdown1

What are the implications of these days when all 30 current Dow components end in the red? Historically, it seems outperformance has ensued. Looking at the 49 qualifying signals since 2009, average Dow returns over the next week and two weeks are 1% and 1.2%, respectively, versus anytime returns of 0.3% and 0.6%. The percent positive is also slightly higher after the signal.

At the same time, things tend to get volatile in the aftermath of these "all negative" days. Focusing on the single-week return, the average positive is 2.6%, compared to a 1.6% anytime gain. However, the sword cuts both ways -- the average post-signal Dow loss is 1.9%, compared to an anytime average loss of 1.6%.

150910dowdown2

 


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