Home > CFA L2, equities, quantitative analysis > TSX is up 5% in 7 days – will the rally continue or fizzle out?

TSX is up 5% in 7 days – will the rally continue or fizzle out?

The TSX Composite index is up 4.79% in the last 7 trading sessions on increasing volume… quite the gain you might say. What is the return following a huge parabolic gain?  

First, here is the 3-year chart showing the 7-day return…  

Source: stockcharts.com

 

Clearly there are few days where the 7-day return is greater than 5%… I suspect that is due to  higher than average volatility… So I went back and looked at 10 years of data and is here the distribution of 7-day returns  

  

Return Period – 7 days  

MIN – -22.6%  

MAX – 15.8%  

Threshold – 5%  

Observations – 2686  

Observations > Threshold – 99  

Just under 4% or 100 days in the last 10 years was the 7-day return greater than 5%… What is the 3-day return after these 99 observations? (I choose 3-days simply because it takes a lot less time to go down than to go up…yes, I’m biased to the downside)  

And here is a distribution of the 3-day (ex-post) returns after the 7-day 5% rally… the positive vs negative periods are fairly distributed (52% negative vs 48% positive) but with a fatter right tail i.e. more periods with higher positive returns or in other words… the chances of higher gains are higher than higher losses.  

  

 

   Note: As of 10am today (03Sep2010) the TSX is up about 0.35%

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  1. cklguy
    September 3, 2010 at 10:02 PM

    Good work on your analysis.. interestingly 8 days in a row of gains, which hasn’t ery happened very often either.. we seem to be into 800-900 point up lgticks and down ticks.. from what I’ve gleaned usually around 10-15 days from top to bottom, with 50ish days being the extreme.. would be interested to hear your thoughts on.

    • September 7, 2010 at 12:49 PM

      thanks cklguy

      I haven’t really analyzed the time-frame of down legs given a certain % drop… I will try to dig something up…

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