Is there necessarily a close correlation between the ratio of up/down days in a year and the overall annual return of the FTSE 100 Index?
The following chart plots the ratio of up/down days of the FTSE 100 Index in each year and its annual returns since 1984.
For example, in 1985 (the second set of bars in the chart) there were 253 trading days, of those the Index was up on 136 days (53.7% of total trading days). This percentage figure is normalised by deducting 50% and plotted as 3.7% on the chart. In 1985 the Index increased 15% which is shown in the orange bar to the right.
The final year in the chart, 2015, has been highlighted with a grey box (partly to indicate that there are still a few trading days left in the year at the time of writing).
A quick glance indeed shows that positive return years are usually accompanied by a positive ratio of up/down days. In other words, when the index has risen on more days than it has fallen in a year the index tends to be up overall in the year, and vice versa.
The largest annual return for the FTSE 100 Index (1989) was accompanied by the largest positive up/down ratio (9.3%); while the lowest annual return for the FTSE 100 Index (2008) was accompanied by the lowest up/down ratio (-6.5%). (NB. the Y-axis scale has been truncated in the chart to aid legibility; the annual returns in these two extreme years were: 1989: +35% and 2008: -31%.)
So far, so unsurprising, but there are some interesting features to note here:
- In the final run up to the dot-com crash (1995-1999), one can see that while the annual returns were, generally, increasing each year, the up-/down ratio was in fact decreasing. This divergence might have been an early indicator of trouble.
- There is a definite bias for the up/down ratio to be positive (i.e. for the market to be up on more days than it falls), and when the ratio is negative it is quite small (in only two years has the ratio been less than -2%: 2002, 2008).
- The greatest divergence in any year was in 1991 when the up/down ratio was marginally negative (the Index fell on 127 of the 253 trading days), and yet the Index ended the year up 16%. Oddly, the previous year, 1990, the up/down ratio had been identical, but the Index ended the year down 12%.
- The up/down ratio and annual returns for the FTSE 100 have only diverged (i.e. had opposite signs) in five years: a run of three years 1991-1993, then 2014 and, so far, 2015.