S&P 500 Hasn't Done This Since 2018

Outside days occurring during 52-week lows is quite rare

Senior Quantitative Analyst
Oct 19, 2022 at 8:38 AM
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This week I’m looking at outside days on the S&P 500 Index (SPX). An outside day on a stock chart is when the day’s high is higher than the prior day high and the day’s low is lower than the prior day’s low. Also, the open to close difference is larger than the difference the day before. This is easiest to see on a candlestick chart. The chart below shows the S&P 500 since September and highlights two outside days.

The first outside day on the chart is a bearish outside day. That’s a special outside day in which the stock closes below the prior day’s low. The second outside is a bullish outside day in which it closes above the prior day’s high. The bullish outside is especially relevant as it occurred at a 52-week low in the index. For the rest of the article, I will be investigating how the S&P 500 tends to perform after these outside days.

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Bullish vs. Bearish Outside Days

We have open, high, land low, close data on the S&P 500 going back to 1978. The tables below summarize how the S&P 500 has performed after bullish outside days compared to bearish outside days. The last table shows typical returns for any day since 1978.

Outside days, whether bullish or bearish, have led to negative returns the following day which I found interesting. Perhaps the volatility of an outside day tends to make investors nervous? Over the next week, however, stocks tended to outperform after a bearish outside day. To a lesser extent, the market underperformed after a bullish outside day. So, over the next week, it seems the outside days indicate climactic buying -in the case of a bullish outside day- and climactic selling -in the case of a bearish outside day.

When you go out farther than a week, the data gets muddied in that both types of outside days beat the market over the next month. Then at three months after, it’s mixed with slight outperformance after a bullish outside day and slight underperformance after a bearish outside day. I wouldn’t use outside days on a such a general basis to predict market movements out further than a week or two.

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Bullish Outside Days at 52-Week Lows and Highs

I mentioned earlier that the bullish outside day which occurred last Thursday coincided with a 52-week low. The tables below show S&P 500 returns after bullish outside days when they occurred at a 52-week low compared to when it occurred at a 52-week high.

It has been a rare occurrence at a 52-week low with Thursday marking just the eighth signal. The next day averaged a loss of 0.05% despite five of eight returns being positive. In general, returns were very bullish after that first day with the S&P 500 averaging over a 3% gain over the next two weeks.

Bullish outside days at 52-week highs have been more common. In this case, the S&P 500 tended to underperform. A week after these signals, the index averaged a loss of 0.09% over the next week with 55% of the returns positive.

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This last table shows the individual dates of bullish outside days that occurred alongside a new 52-week low. The last occurrence in 2018 marked a great buying opportunity with stocks gaining 5% over the next two weeks and 14% over the next three months. The signal before that happened all the way back in 2008 and the market fell almost 20% over the next week. Generally, however, these signals have been good times to buy.

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