Tuesday, January 17, 2017

Dow In Tightest Range Ever: A Case for Short-Term Weakness

Friday's close made it official that the last month has been the most narrow 21-day (a full trading month) range (1.42%) in the history of the Dow Jones Industrial Index .  In other words, things have really stalled out.

With this in mind, we went in search of other narrow periods to see how the index performed over the following weeks.  The results were actually different than what we anticipated.

Returns in the Dow are weaker in the short-term looking out 5, 10, and 20 trading days versus the whole sample.  We do believe in the "trend is your friend" mantra and the path of least resistance remains up.  However, the data below suggests that we could be in for some slight underperformance before we resume higher.

Heading into the inauguration it wouldn't surprise us to see a volatility event as the VIX has been asleep for some time and the kick-off of the Trump presidency might serve as the perfect catalyst.

The big question we have: Is the selling the inauguration too obvious of a play at this point?  Everyone seems to be talking up this strategy.

Below: All instances where the 21-day range of the Dow was less than or equal to 2.25%.  We filtered out clusters. 

Ryan Worch is the Managing Director of Worch Capital LLC. Worch Capital LLC is the general partner of a long/short equity strategy that operates with a directional bias and while emphasizing capital preservation at all times.

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