Gavekal Capital: The Market Is Due For A String Of Down Days

Wednesday, June 4, 2014

The Market Is Due For A String Of Down Days

A random walk theorist would suggest that over a long enough period of time, the number of days the market ended higher should equal the number of days the market ended lower. Said differently, the percent of "up days" should equal the percent of "down days". In our work, we have discovered that the average daily percent change of a stock (or index) has a higher correlation to future returns than the percent of days the stock ends higher. However, the percent of up days is a mean reverting series so when extreme levels are reached it (as they are now) pays to take note. Since 1980, over a moving four month period, out of 100 days the market has ended higher nearly 54 of the days on average. As the chart below indicates, the percent of up days tends to stay within 1-standard deviation of the mean (ranging from about 47-60). The four month cumulative percent of up days is currently sitting at just below 64%. Given the mean reversion tendencies of this series, it is fairly safe to say that investors are most likely entering a phases where the number of down days will out number the number of up days.

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