Stock Phenomenon Could Mean Sluggish Market Ahead

The SPX sports the eighth-smallest gain/loss ratio since 1950

Senior Quantitative Analyst
Jul 18, 2018 at 7:47 AM
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The good news for the market this year is that the S&P 500 Index (SPX) has been higher 58% of the time. That's an impressive stat, ranking 13th out of 69 years since 1950. This plethora of up days, however, has led to a relatively small return of just around 5%. The trendline in the chart below shows that, given the number of positive days we've had, you would expect a return of about 13%. This week, I'll investigate whether this phenomenon tells us anything about what we might expect going forward.

SPX ytd vs up days MMO

Positive Days and Subsequent Returns

This table summarizes the rest-of-year returns for the S&P 500 based on the percentage of positive days through 135 trading days (this point in the year). When less than half the days were positive, that's been a bad sign going forward. In that case, the index has been positive just 44% of the time throughout the rest of the year. When more than half the days were positive, the rest of the year has been positive close to 80% of the time. On average, the S&P 500 has been better when the number of positive days was more than 50% but less than 56% on Day 135, compared to being over 56% as they are now.

spx returns positive days day 135

Low Gain/Loss Ratio Has Led to Sluggishness

If there are a lot of up days compared to down days, but the return is minimal, then it must be the down days are larger than the up days. That's certainly the case this year. The average return on positive days has been 0.66%, but the average loss on down days is 0.81%. When you take that average gain divided by the average loss, you get a ratio of 0.81. That's the eighth-smallest ratio since 1950.

I looked at prior years that were positive on the year and at least half the days were positive. I did this, rather than only years with at least 56% of days positive, to get more data points and because there wasn't a significant difference in returns once you got to half of the days positive. Then I separated out their rest-of-year returns based on their average gain/loss ratio.

A low ratio, as we have now, has previously led to a disappointing average return of less than 2% for the rest of the year. The index has gained, however, 78% of the time. The standard deviation of returns is very low in this situation. In other words, historical instances have led to a frustratingly sluggish market. Given my article last week about being between extremes for extended periods of time, we should be used to that.

spx rest of year 50percent positive days


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