Congratulations to Andrew Thrasher, CMT for his winning research, “The 5% Canary”
Methodology: To examine the potential predictive value of the time it takes for the S&P 500 and Dow Jones Industrial Average to decline by 5% from a 52-week high, a study of their respective price histories from 1950 to 2021 was conducted. The study focused on the number of trading days it took for the indices to decline by 5%, and how that time period correlated with subsequent price movements. The study also looked at instances where the initial 5% decline occurred over a protracted period of time, and how those instances were followed by bullish opportunities.
Implications of a 5% Decline: The study found that when the S&P 500 or Dow Jones Industrial Average declined by 5% within a short period of time (less than 20 trading days), there was a higher likelihood of further downside momentum. In these instances, investors may consider reducing their equity exposure or implementing risk management protocols to protect their portfolios.
Bullish Opportunities: However, the study also found that when the initial 5% decline occurred over a protracted period of time (more than 50 trading days), there was a higher likelihood of a bullish opportunity. In these instances, investors may consider adding to their equity exposure or implementing a buy protocol to capture potential upside.
Conclusion: The time it takes for the S&P 500 or Dow Jones Industrial Average to decline by 5% from a 52-week high has significant implications for investors. The speed at which the decline occurs can help investors identify both downside mitigation as well as upside capture potential.
