This is a guest post by Wayne Whaley, CTA:
The impetus for this study is the theory that March is a pivot month for the market, with the direction of the market changing at some point in March.
To test this market theory, I decided to look at a 3 month range (or 63 consecutive trading days) and see how the S&P 500 behaves before and after this this point. To set our standard, note that the average 3 month return for the S&P 500 index is 2.04%.
Three Month Study (1951-2009)
If the 63 trading days before each March 16th are up, then the following 63 trading days are 27-12 for an average return of 1.94%, in line with normal (2.04%) monthly performance.
If the 63 trading days prior to March 16 are down, then the next 63 days are 13-7, for an average gain of 3.38%, slightly higher than the normal (2.04%) monthly performance.
Three Month Study (1951-2009) - Sharp Moves
The more pronounced the 3 month move coming into March, the more pronounced the reverse pivot on the other side of the inflection point.
If the 63 trading days before each March 16th are down more than 3%, then the following 63 trading days are 9-1 for an average return of 4.70% - that’s 2.66% above the average 2.04% return we expect.
If the 63 trading days before March 16th are up more than 3%, then the following 63 trading days are 7-7 for an average return of -0.35% - that’s 2.39% below the average 2.04% return we expect.
As is the case in most S&P 500 studies, it is much easier to find bullish angles than bearish angles. There is strong evidence that falling markets often reverse sometime in March. In 2010, the S&P was up 4.8% in the 63 trading days prior to March 16th. The data doesn’t suggest that this is solely a reason to expect a top to put in, but the results suggest that performance on average is normally below the normal expectations and this should be respected.
Although not applicable to 2010, the most interesting results to come out of this research are below:
Years When the 3 Months Prior to March 16 are down 3% (or more)
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