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Beware Bernanke?


The Testimonies have had an uncanny knack for occurring near relatively major market inflection points.


Starting tomorrow, Federal Reserve Chairman Ben Bernanke will begin a semi-annual two-day testimony before Congress.

This was previously referred to as the Humphrey Hawkins Testimony, and it has had a habit of triggering big moves in the stock indices.

The last seven times a Fed Chairman delivered the speech, the S&P 500 rallied that day each time. With an average return of +0.7%, and a maximum intraday gain nearly five times larger than the maximum loss, the days have been extraordinarily positive. However, we should be careful to note that prior to 2004, equity performance the day of the speech was much more mixed.

Just as consistent, though, is that the day following the first day of the testimony has been subpar. Only two out of the last seven showed a positive return, and even looking over the past decade, the bias has been decidedly negative- a meager five of the last 22 Testimonies have led to a positive next-day return.

Perhaps it's simply coincidence due to when the Testimonies are delivered (in mid-February and mid-July each year), but they have had an uncanny knack for occurring near relatively major market inflection points. The last one happened right before the late-February mini-crash, and the one before that right at the 2006 summer low.

Going back to 1999, there were six times that we saw one of these Testimonies after the S&P 500 had enjoyed a rally (by being higher than its close one week and one month ago). One month later, it closed lower each time, and its maximum gain over the next 21 trading sessions averaged +1.3% while its maximum loss averaged -4.1%, nearly four times as large. Omitting one instance in 1999, the average maximum gain would have nearly been cut in half.

Something to keep in mind as we wade through an avalanche of earnings reports and very clear technical levels.

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