April 20, 2011 Best Day Follows Worst Day
Todays gains, the largest since March 21, follow Mondays worst day since March 16. With just two days separating these happenings, this down then up should lead to caution, not celebration. A market this volatile requires caution, not celebration. There is no need to look at the records to justify restraint; it should require nothing more than understanding that overreactions in one direction generate an opposite comeback.
Examining the week so far reveals that todays and yesterdays advances, following Mondays decline yields a pattern of +2/-1. Some 194 previous closes since 1950 share this profile, with 87 of these coming after 1999.
Separating these for the two bull markets and the two recoveries, note that 29 occurred when prices were falling while 58 accompanied rising prices. Oddly, daily increases during the bear phases beat the gains in the recoveries – not by a small amount but by a factor of two.
During the 2000/2003 decline, for example, the average S&P500 gain for the 15 +2/-1 days was 1.37 percent but the following recovery, which had 45 of this pattern, the average daily advance came to just .61 percent.
Turning to the following day, in the past the number of increases just about equaled the number of declines. Further, the frequency of these positive and negative next-days did not vary over the two bull and two bear markets. In other words, the percentage of rising and falling next-days was not different over these four periods.
DJIA 1.52 percent
NASDAQ 2.10 percent
S&P500 1.35 percent