foxex: The 56-Week Pattern

Chart Advisor | Focus on the Price

Tuesday, September 15, 2020 Headlines

1. Stocks' recent sell off was right on time with 56-week pattern
2. The bigger picture of this pattern
3. The gold variation

Market Moves

The major indexes sold off last week in a surprisingly strong downward move. It wasn't terrible compared to past pullbacks, but for a lot of investors just jumping into the game, it was disappointing. Perhaps, that is why the Chart Advisor email box is occasionally peppered with someone sharing a fretful sentiment as the market drops.

Thankfully in recent years it has rebounded a lot after each dip. But it won't always go that way. Many a chart reader asks if there is any way to anticipate such a thing and to avoid losses when they happen? No one has found a perfect way to predict the markets, although there is one dynamic worth considering. I call it the 56-week pattern and though it is my own invention, the professional money managers I have shared this with assure me they consider it to have merit. Tracking back through 26 years of data on State Street's S&P 500 index ETF (SPY) persuades me that this is more than a random occurrence.

Here is how it works: any time the S&P 500 index (SPX) rises more than five percent within a 20-session stretch, 56-weeks later there is often a sell-off of varying proportions. This happens consistently enough that if you track through the data, you can calculate that the average return for the 40-day period at the end of 56 weeks is almost a full one percent lower than the average return for any other 40-day period over the past 26 years. The reason for bringing it up now is that, as shown in the chart below, the recent pullback came at the beginning of such a pattern. Even more interesting is that three more ending patterns are due to create selling in close proximity during the second quarter of 2021.

The Bigger Picture of This Pattern

The 56-week pattern has a simple explanation. To take advantage of favorable tax treatment, many high-net worth investors and professional money managers prefer to hold positions longer than one year. What that means is that if a lot of them buy at the same time, it shows up in the market averages. A little more than a year later, there comes a point where a lot of money is ready to be taken out of one position and moved into another. This is the dynamic that helps drive sector rotation.

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The Gold Variation

For the Gold markets, a different dynamic seems to be in play. A 77-week pattern seems to be apparent where Gold begins a rise after falling, and then begins selling off after 77 weeks. There isn't much of an explanation for why 77 weeks should matter among gold buyers and sellers, but it seems to be somewhat recurrent.

The chart below depicts a few times where this happens on the State Street Gold Trust ETF (GLD). There is not a large enough sample size for this pattern to be trustworthy. Even so, the current edition of this pattern seems to indicate GLD may not be ready for a significant pullback until mid-way through the year 2021.

The Bottom Line

Stocks sometimes pullback strongly (as they did last week) when a large collection of buyers coincidentally has the desire to sell. The 56-week pattern tracks times where a collection of buyers may trigger a sell off. Gold prices don't show the same pattern.

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