Friday, December 7, 2007

NASDAQ100 Up 7% in 10 Days: What Happens Next?

As of the time of this post, the NASDAQ 100 (QQQQ) has rallied more than 7% during the past ten days. Quite a "V" bottom, and a rather rare one at that. In fact, this last occurred in April of 2003. I ran a quick scan of the last ten years to see what happens over the subsequent five trading days when such fast moves of equal magnitude occur.

Of the 66 instances, 38 were negative (58%) for a total loss of 62% (average loss of -0.93% per instance). The chart below shows the equity curve of the hypothetical trade back through December 1997 (about 2,500 trading days):

In spite of the average loss over the period in its entirety, you can see how the trade was actually positive on balance during the heavy upward momentum "bubble" period through the Spring of 2000 before it devolved into a pattern of sharp-bounce breakdowns during the bear market period that ensued.

This month is typically bullish and has brought relatively good news. The Federal Reserve's decision next week will certainly dominate trading for the rest of the month. While many of the major indices are back at prior highs (save the subject of this study), volatility has increased significantly since this past summer, not unlike the 2000 transition period.

At the end of the day, how you view this study thus likely depends on which type of environment you believe we are in.

UPDATE: For a good second interpretation of the recent surge, read this TraderFeed article on new highs. I always advocate looking at multiple indicators to get a true read on the market. Price is just one, and as you can see above, in this instance its interpretation is indeterminate.


Jeff Pietsch CFA, Esq said...

Well, wasn't that interesting... turned out to be a timely article!

Jeff Pietsch CFA, Esq said...

To wrap this one up, in this instance the NDX was down about 2.8% five days after the post. Sometime statistics such as these can identify good times to hedge with options, if not go all out short, if that is your cup of tea.