Blog - Investing Notes

September 16, 2008 - After S&P 500 Index 52-week Highs and Lows...

Following up on our blog entry of 9/15/08, we wonder whether the S&P 500 index exhibits unusual behavior in the week or two following 52-week highs and lows. That prior study of individual stocks suggests index outperformance after both extremes, but indexes sometimes behave differently from individual stocks. Using weekly closing data for the S&P 500 index over the period 1/6/50-9/12/08 (3,062 weeks), we find that:

The following chart compares the average one-week and two-week returns for the S&P 500 index after 52-week highs and lows in the weekly closing levels over the entire sample period. The frequency of 52-week highs is 17.9% (548 out of 3,062 weeks), and the frequency of lows is 3.8% (117 out of 3,062 weeks). On average, the index tends to outperform after 52-week lows and underperform after 52-week highs, with the former effect larger in magnitude than the latter. Most of the abnormal performance comes in the first week after the new extreme.

Note that opportunities after 52-week lows occur only about twice a year on average. In fact, these opportunities cluster in bad market years.

Is there a risk associated with the (average) reward after 52-week lows?

The next chart shows the average one-week returns for the S&P 500 index after 52-week highs and lows in the weekly closing levels over the entire sample period, with variability ranges of one standard deviation. While the average return the week after 52-week lows is abnormally high, so is the volatility. The ratio of return to volatility is about the same for all weeks, the week after 52-week lows and the week after 52-week highs.

In summary, the average return for the S&P 500 index is abnormally high (low) after 52-week lows (highs), but the volatility is also abnormally high (low).

Behavior of style and sector exchange-traded funds (ETF) after long-period highs and lows might be interesting, but these ETFs have not been around long enough for useful tests.

For related research, see Blog Synthesis: Some Trading Indicators.