Much attention was given after Friday's close to the fact that the Dow had its best
one-week percentage gain since 1982, and I went back and ran the numbers for the 20
largest one-week jumps in the Dow Jones Industrial Average since 1970. My expectation
was to see that in bear market environments, you can see big one-week moves that end
up being fakeouts that result in future losses, while in bull markets these rallies
would serve to further build upside momentum. Here are the results:
Dow Industrials Biggest One-Week Gains and Subsequent Returns
As you can see, the bottom line average returns are very favorable. You notice
several clusters of time periods where we saw multiple signals, such as 1974, 1982,
and 1987. The 1982 and 1987 examples were the start of sustained new uptrends, as
was the last Gulf War initial rally in January 1991, plus the October 1998 bottom
coming off the Long-Term Capital hedge fund debacle. In the 19 other cases, 13 of
these signals (68%) resulted in gains four weeks later and 14 out of 19 (74%) were
winners after 13 weeks (roughly three months). At the half year point 26 weeks
later, in 18 cases only one example from the first June 7, 1974 signal was
unprofitable. Interestingly, the full year point saw a few more move into the loss
category, though 14 of 18 (78%) were profitable 52 weeks later.
You also notice that when we have gains in the Dow over the first few weeks, those
gains are usually maintained one year after these signals. Only once in September
2001 did we not maintain the gains at the 52-week point. When we start out with a
loss after four weeks, the results one year later are more mixed. In six negative
4-week readings, we saw half of those see losses at the 52-week point and half
reversed to gains.
The cluster effect I mentioned earlier also appears significant, compared to lone
signals in a given time period. The first signal in June 1974 was not a good one,
but the second and third signals in the fall of 1974 proved quite effective looking
out over the six to 12 month periods. The second buy signal in 1982 proved there was
more upside ahead, as did the back-to-back strong weeks in December 1987 as the
market bottomed after the Crash. Lone signals since this bear market began, such as
the week after the market top in March 2000 and September 2001 have not proved
effective, so if there was one thing the bulls should want to see here, it's another
super-strong week for the Dow to suggest this is not another lone fakeout.
The bottom line here is that we would like to see another upside burst for
confirmation. But in our longer-term view the historical averages suggest that the
bears should not get too comfortable in betting that the next 52 weeks is going to be
a bearish one. That would be fighting the odds, and success as a trader is all about
putting the odds in your favor. As a follow-up, I'm compiling data back into other
deep bear periods like the 1930's to see how the Dow one-week gains turned out over a
longer data sample. I'll keep you posted on the results.
KEY SUPPORT AND RESISTANCE LEVELS
SUPPORT RESISTANCE
Nasdaq Composite 1400 1440
S&P 500 880 910
Dow Industrials 8420 8620
Se não receio o erro é porque estou sempre pronto a corrigi-lo
There's no bull side and no bear side. JUST THE RIGHT SIDE!
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