Quantitative Situational Analysis: Market action over the last couple of weeks made me writing this post. Very strange things are going on, especially for somebody who has been used to the mean reversion type of market of the last decade. The SP500 has periods of EXTREME runs: currently we are in an up-run with little to no pullback since 6th of July. Prior to this we have had a period of EXTREME down runs with almost 10 consecutive down days. So this got me thinking: did that happen before and what’s the expectation for such a period?
Currently TSI for SP500 is at 1.9+
Obviously we are in a period of strong trending markets within the intermediate time frame. So my way of measuring trend strength is by using TSI. Looking over a period of roughly 5000 bars, going back until 1990, we got about 25% of the days in the upper quartile of TSI. So 25% of the time the market has been in that section. That’s actually not that seldom! But look at the picture bellow. You see the SP500 cash index all the way going back until 1990 incl. TSI in the bottom. The redline indicates the value of 1.9
Since 1990 the market only had a few peaks above the 1.9. However prior to 1999 it’s been quite common to see these extreme situations. What is to be expected when the market is trading in that section? To answer that question i looked at next day returns for specific TSI value ranges. I divided the table into next day returns for times when ROC200>0 and ROC200<0 in order to account for overall market trend.
SP500 in a sweet spot
Bottom line: Current market behavior isn’t that uncommon, although it occurred less often the last 10+ years. SP500 is trading in a historical SWEET SPOT! Next day returns as well as risk adjusted returns are among the highest when TSI > 1.9