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Market Measures

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Does the Market Have a Memory?

Market Measures

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Here at tastytrade, we believe in the “Efficient Market Hypothesis” that all the news related to the market is priced into the market. Many traders insist the market has a memory and that past movement can predict future movement. We previously examined whether the market is more likely to trend higher after consecutive up days in a segment of The Skinny on Options Data Science from May 27th, 2015: “Probabilities of Market Moves” which showed that an up day was seen just 53% of the time. What though about large moves in the market? Do large moves in the market predict a trend any more accurately than consecutive up days?

Our study was conducted in the SPY (S&P 500 ETF) from 2004 to the present. We wanted to find out when the market goes outside its 45-day, 1 Standard Deviation (SD) implied move, if it stays outside or goes back and in what direction does the market typically test when it does go outside it's implied move.

A graphic showed that 84% of the time the market stayed within the 1 SD implied price move as opposed to the 68% that theoretically should have occurred. On an average 6.7% expected move, the market actually moved 4%. A table comparing a 1SD move to the upside to a 1SD move to the downside was displayed. The table included the percentage of time and the average number of days into the 45-day cycle. The table showed that it was more probable that the SPY tested the downside and it did so earlier in the 45-day cycle.

A second table comparing 1SD up moves and 1SD down moves was displayed. This table included the average move after a 1SD move, probability of an up move after the 1SD move and the probability of a down move after a 1SD move. The table showed that no matter what, after a 1SD move, the market tended to drift upward in the remaining days in the cycle and that up moves of 1 SD were followed by a slight continuation of that move.

For more on Implied Market Movement Calculations see:

Market Measures from March 24th, 2015: “Expected Moves | Calendar or Trading Days?”

Watch this segment of Market Measures with Tom Sosnoff and Tony Battista for the key takeaways and the results of our study on market movement after a large move in the market.

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