Shutdown! S&P Up? Down?

A bullish or bearish impact? That is the question.

A first glance at the stats, suggests a bullish impact.

For example, in the Market Watch study above ‘This Is What Happens in the Stock Market….‘, it concluded:

the impact was bearish 55.6% of the time with an average impact of -0.6%.

But, as with all things in trading, we need to have a deeper look.

The key to assessing the impact is ‘uncertainty’.  We all know that markets tend to head south in uncertain environments. So, I had a look at the shutdowns and concluded:

only shutdowns that extended beyond three days created the uncertainty necessary to worry the stock market.

So, if we eliminate all shutdowns that are three days or less, what does that give us? Allowing for outliers, the impact was:

• Mean: -1.79% with a standard deviation of 1.99
• Median: -2.00%

What does this all mean for traders?

Applying basic stats, there is a 67% probability if the shutdown extends beyond five days, we’ll see the stock market move from 0.2% to -3.78%

However, because the sample is not a Normal Distribution, I prefer to use the method Pete Steidlmayer taught me. Yes, I know maths purists will have a fit; but, the bottom line: the approach makes me money.

Pete’s approach says that if we see a shutdown that goes more than five days, we’ll see a drop of 2% to 3%.

I then looked at the impact of the shutdown the day after the announcement. Allowing for outliers:

• There is more than a 95% probability we’ll see a one ATR move south in today’s trading (around 15 points down from Friday’s close)
• UNLESS the shutdown is resolved before the market close today (EST).

How would I apply the impact to my trading?

• Assuming the shutdown lasts more than five days, and since stocks are still in a strong uptrend, I’d wait for the shutdown to end – then look to be a buyer.
• If the shutdown lasts less than five days, I’ll assess the S&P picture then; I’ll probably be looking to buy, but we’ll see at the time.  I’ll revisit the S&P and blog with my entry and trade management details.
• If the shutdown ends today, and we see a breakout to the upside, I’ll probably look to buy the breakout with initial stops below the day’s lows.