Friday, September 9 2016, was a panic sell day around the world when the S&P 500 broke out of its narrow range day to a large decline of more than 2.27%. It was 90% downside day – when 90% of the volume is to the downside. The market participants were nervous for quite some time and once few critical support levels were broken, market went though ‘sell-everything’ mode.
The tendency after such a sharp decline is to get into the ‘sky-is-falling’ mentality. But how realistic is that? Let’s analyze it.
Not All Situations Are Similar
Since 1980, S&P 500 had 168 instances of a decline greater than or equal to Friday’s loss of -2.45% – the average decline was -3.66%. The next day, 60% of times, the S&P 500 bounced up with an average gain of +0.27%. For 5-day period, these numbers are 60% and +1.02% respectively. The 10-day period, the numbers are 59% and +0.84% respectively and the 20-day period (almost one month), the numbers are 62% and +1.28% respectively.
We know the markets behave differently during the bull-markets and bear-markets and these numbers are vary, albeit slightly. Naturally the most of large declines occur during bear market but the upside potential is still there for the next few days.
For the purpose of this analysis, we are considering the position so of trend-lines on Thursday as our bull-market. On Thursday, S&P 500 closed above its 20-day SMA and 20-day SMA closed above 50-day SMA. Since 1980, there were 29 days when the index declined more than or equal to Friday’s decline when its price and SMAs were aligned like they were on Thursday. Over a period of next several days, it was above the big decline day close. The average change after 20 days was 2.2% and that happened 79% of times.
Big Caps Out Perform Small Caps
The relative strength of indices vary. Big caps generally out-perform small caps in rebound from a big decline in a uptrend. The average 1-day bounce for S&P 500 is +0.5%, Dow Jones Industrial Average +0.3%, NASDAQ Composite +0.2% and Russell 2000 +0.3%. The average return for S&P 500 and DJIA either increase or remain the same as the comparison period is lengthened. This is not the case of NASDAQ and Russell 2000.