This was published on Sentiment’s Edge by Jason Goepfert on 5/28/2009. The first move out of this very tight range was up and now we are slightly down, or the range has expanded a little. This hasn’t played out yet so still worth pondering.
It’s no secret that stocks are stuck in a range. If you have a moderately long time frame, then you could have taken the past month off and not been any worse for wear. Ahh…sweet, sweet hindsight.
The remarkable thing about the past four weeks is just how tight the range is. If the S&P can muster a print at 923 or so by Friday, then we’ll have four straight weeks where every week’s high is within 0.75% and every week’s low is within 0.75%.
The last time we saw this kind of four-week cluster was during the end of December 2006 through the first week of January 2007 (it’s not surprising that many of these occurrences happen around holidays when volatility is dampened).
Using the S&P 500 since the late 1920’s, we usually saw a quick move to the downside out of these consolidations – the next week was positive only 32% of the time. But after that, the returns turn considerably more positive.
That’s something we very often see with volatility contractions…the first move is usually a fakeout before a more sustained move in the other direction. We’ll look at that more in depth on the main site tomorrow.
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