How Major U.S. Indices Perform After a Panic Sell?

On Friday September 9 2016, markets around the world were in panic sell mode. Investors sold almost everything and the day was a 90%-downside day – when 90% of the volume is to the downside. We covered on Monday how major U.S. indices perform after a panic sell like the one on Friday. We noted that history says that the odds are good for a bounce the next day and that is what happened.

Following a soothing, dovish speech by Fed Governor Lael Brianard, U.S. markets bounced back with S&P 500 recovering 58% of its loss on Friday. However, Tuesday was a down-day and it is time to take further look at our analysis.

On Monday, we wrote,

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.

Big Caps Still Outperform Smaller Caps

Daily Average Change Up % After a Big Decline

For 2-day, 3-day and 4-day periods following a big decline like Friday’s, the average change is still positive but the percentage of times it closes up drops.

For S&P 500, the average change over 1-day period is +0.5% with 75% chance of an up-day. For 2-day period this becomes +0.6% (higher) and 64% respectively. This means that’s odds are higher for 2nd days to be down if the first day is up but the average 2nd up-days advances more than the decline of average 2nd down-day.

For 3-day period the figures are +1.0% for average change and 64% for the chance of an up-day. For 4-day period the corresponding numbers are 1.2% and 68% and for 5-day period the numbers are +1.4% and 75%.

The 3rd day has 61% chance of being an up-day. The odds increase for both the 4-day and 5-day. Also, the average changes on 3rd, 4th and 5th up-days are higher than the average change on down-days.

For other indices, the corresponding figures are similar, though the average gains for Russell 2000 trail that for Dow Jones Industrial Average, S&P 500 and NASDAQ Composite. Russell 2000 has negative average change on 2nd, 3rd and 5th day.

Tuesday being a down day increases the odds of Thursday and Friday to be  up-days. Also, any down day this week will increase the odds for days following it to be up-days. Mind you, these are just probabilities and not certainties.

Following are the odds and averages for individual days after a big decline – i.e. day-over-day odds and average change.

Avg. Change After a Big Decline Daily Up %

 

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