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Dead Cat Bounces and Armchair Contrarians

After declining for 9 consecutive days, the S&P 500 rallied over 2% this Monday (November 7). It was an unusually strong day where over 90% of the total volume in the NYSE was volume in advancing shares, a so-called “90% upside day.” Such days are rare historically, occurring less than 1% of the time since 1970. The extreme strength following a long string of declines provoked much commentary:

“Fade it,” said one prominent pundit.

“It’s a Dead Cat Bounce,” said another.

“The market has gotten ahead of itself,” said a third.

(Note: we heard similar calls following 90% upside days in late January and June.)

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To which the response should have been: “based on what, exactly?”

But we know better than to expect that in the financial media where the goal is not to educate but to entertain. These entertainers, held up as “experts” in their field, are making predictions on anything and everything based on nothing more than a whim.

Why do I say that in this particular case?

Because the unbiased data on 90% upside days gives no indication of a “Dead Cat Bounce,” a market that you would want to “fade,” or one that has “gotten ahead of itself.”

Quite the opposite seems to be true. Since 1970, the forward returns (1 week through 12 months) following 90% upside days are above average with a higher percentage of positive returns.

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What has happened since Monday? The S&P 500 has continued to move higher, with no word from the armchair contrarians that were telling you to “fade it” on Monday.

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Will it continue to rally? I don’t know. The above tables are just odds based on the past, probabilities that show extreme strength (90% upside days) tends to beget strength, not weakness. “Tends to” is far from “always,” of course, and there have been a number of times where the market went down following such days. Nothing precludes declines in this case as well. But to predict a drop based solely on a strong up day is a call based on providing entertainment value, not analysis.

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This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.

CHARLIE BILELLO, CMT

Charlie-Bilello

Charlie Bilello is the Director of Research at Pension Partners, LLC, an investment advisor that manages mutual funds and separate accounts.  He is the co-author of four award-winning research papers on market anomalies and investing. Mr. Bilello is responsible for strategy development, investment research and communicating the firm’s investment themes and portfolio positioning to clients. Prior to joining Pension Partners, he was the Managing Member of Momentum Global Advisors and previously held positions as a Credit, Equity and Hedge Fund Analyst at billion dollar alternative investment firms.

Mr. Bilello holds a J.D. and M.B.A. in Finance and Accounting from Fordham University and a B.A. in Economics from Binghamton University. He is a Chartered Market Technician (CMT) and a Member of the Market Technicians Association. Mr. Bilello also holds the Certified Public Accountant (CPA) certificate.

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