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Thursday, November 29, 2007


that's why we're long!

per bloomberg, the sharpest two-day rally in some years.

The Standard & Poor's 500 Index added 40.79, or 2.9 percent, to 1,469.02, bringing its two-day gain to 4.4 percent, the most since October 2002. The Dow Jones Industrial Average increased 331.01, or 2.6 percent, to 13,289.45, its best daily advance since April 2003. The Nasdaq Composite gained 82.11 to 2,662.91. More than 13 stocks rose for every one that fell on the New York Stock Exchange.

if history provides context, there's probably significant upside still to come. might not be out of the woods in bottom building, though. possibly a near-term return to at least fill the s&p gap at 1430 created by yesterday's opening gap up. and, as barry ritholtz points out, it might pay to be quick to cash.

Since the decline that began on October 30th, the S&P 500 had gone 19 days without having more than one winning session in a row.

• The longest such streak (since 1999) was the 24-day run that ended on 9/21/01. The second longest streak was 22 days, which ended on 3/21/01. There have been two other streaks of 21 days each, ending on 10/3/00 and 4/29/02, respectively.

• Except for the post 9/11 streak, which marked a climactic V-bottom low in the equity market, other spans seemed to define the first leg of a downdraft that "paused" for anywhere between 4 and 14 days before it resumed.

• Visually speaking, the pattern that developed when those prior one-day-wonder streaks ended was a "flag," which in technical analysis terms, often implies that a move -- in this case, the downtrend -- is about half-way over.

• For what it's worth, the same also holds true for the two shorter streaks of 16 days that ended on 1/28/03 and 4/1/05, respectively.

• Based on past history, then, it seems that once the current streak ends ( i.e., we see two or more winning sessions in a row), the risk is that it won't be long before the market begins another push lower.

with that number of data points, the evidence is merely anecdotal. but the probabilities have to be well considered.

as an adjunct, dr. steenbarger with a brusque post that needs to be brusque in order to cut through the cloud of delusion that is constantly attempting to descend on any human being engaged in the exercize of risk taking. i have managed to utter some variation of all seven at some point or another, and will again. hopefully, and maybe be remembering or rereading this, the next time i do i'll cut it off short.

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