Sunday, January 08, 2006

One Day Rises: No Momentum Effects

So far, we've seen momentum effects over the long-term (1000-day periods) and intermediate term (10-day), in which strength begets further strength. Interestingly, however, that pattern does not apply to a day-by-day market analysis. Going back to January, 2003 (N = 759), I found 302 days in which SPY closed higher than the day previous and made a higher price high. The following day, the market's high averaged .49% above its previous day's close and averaged .00% from the previous close to the following day's close. This is weaker than the average .59% from close to next day's high for the sample overall and the average gain of .05% day over day. When I conducted median splits, the strength of the day's rise had no significant impact on the strength of the next trading day. Indeed, strong days--if anything--tend to invite profit taking, not follow through strength. This is but one more example of where it's tempting to generalize patterns from one time frame to another--but perilous to do so.