Technical Factors: S&P 500 36 Month Change Versus Next 12 Month Change

Technical Factors

Using month-month close-close figures only, it is very difficult to find any meaningful, consistent information in the price performance of the S&P500 itself (technical analysis). This does not mean technical analysis is useless, only that when looking at the monthly trend it is difficult to find exploitable patterns.

Rate of Change Indicators: 36 Month Percentage Change in the S&P500 v. next 12 month rate of return:

Last 36 month change in the S&P 500 versus next 12 month change in the S&P 500 , January, 1948-May, 2007, n = 701:
		Last 36 month change in S&P 500:		Next 12 month change in the S&P 500:
Percentiles:	n	From:	To:
Min-25%	175	-43.4%	9.00%	10.33%
25-50%	176	9.0%	25.45%	9.61%
50-75%	175	25.45%	45.65%	9.15%
75-Max	175	45.65%	120.04%	7.36%
		Correlation:		-.098
All:	701		Average:	9.13%

Note the weak (-.098) inverse correlation between the 36 month change and the next 12 month change in the S&P 500. In the 25% of times when the market has risen by 9% or less over the past 36 months, the market rose an average of 10.33% the next 12 months. The stronger the past 3-year performance, the weaker the next 12 months, but not staggeringly so. Avoiding the market when it rose more than 45.65% would have avoided a below average 7.36% average return over the next year. The historical record seems to side with those who believe the market should regress to the mean after periods of historical outperformance and that the relationship between prior performance and subsequent performance is an inverse one. The market performed very strongly (14.1% on average) in the 10% of times when it had fallen by 7.8% or more over the prior 36 months. However, whether this is strong enough and consistent enough to exploit is questionable.

Perhaps the best way to use this information is to grow mildly cautious when the market is 45% or more above its value 36 months ago and to become bullish when it has dropped, especially by more than 7.8%. This is a classic, workable means of putting the adage, "buy low, sell high" to work.