From Dana Lyons: The stock market burst higher on Wednesday from already elevated conditions; has it spent all of its fuel, or could there be more in the tank?

The stock market burst out of its doldrums on Wednesday with the Dow Jones Industrial Average (DJIA) gaining more than 300 points. Many observers had surmised that, given the extended nature of the major averages, the next big mover of a day would likely be to the downside. We certainly sympathized with that argument. However, Wednesday’s rally was a firm reminder that the type of market melt-up that we’ve been witnessing can last longer, and go higher, than one might naturally expect. Still, the extended conditions from which the day’s rally commenced are noteworthy, and rare.

For example, the 14-day Relative Strength Index (RSI), a measure of momentum, on the DJIA was over 75 going into the rally. Anything over 70 is generally considered “overbought”. Secondly, the index was already sitting at essentially a 52-week high. The fact that the DJIA was able to muster enough fuel for the huge up day in spite of already elevated conditions puts it in rare company, historically.

Specifically, in the last 100 years, there have been just 35 other times in which the DJIA entered the day with an RSI above 75 and less than 2% from a 52-week high – and still managed to rally at least 1.1% on the day.

We took a look at those prior occurrences for clues as to whether the DJIA might still have something left in the tank – or whether it had likely spent its last fuel. As it turns out, there is minor evidence for an empty tank in the very short-term, but plenty of evidence to suggest a fuel reserve in the intermediate-term. Here are the aggregate performance figures following the prior 35 occurrences:

As one can see, 7 out of 10 times, the DJIA took a breather during over the next few days following its burst. However, the more compelling takeaway is that the DJIA has historically managed to follow through on its gains in the intermediate-term – at times, almost unanimously. From 1 month to 6 months later, the DJIA was higher at least 75% of the time, highlighted by the 2-month time frame over which 34 of the 35 events showed gains. That’s impressive.

So if today served as a reminder that a melting up market can continue to rise longer and, at times, faster than one expects, this study should reinforce that notion. For as extended as the market appears to be, history would suggest a strong possibility that there is more left in its tank.

The SPDR Dow Jones Industrial Average ETF (NYSE:DIA) was unchanged in premarket trading Thursday. Year-to-date, DIA has gained 6.84%, versus a 7.27% rise in the benchmark S&P 500 index during the same period.

DIA currently has an ETF Daily News SMART Grade of A (Strong Buy), and is ranked #5 of 75 ETFs in the Large Cap Value ETFs category.

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This article is brought to you courtesy of Dana Lyons, JLFMI and My401kPro.

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