December 3, 2008
The indices rose again, and if not as sharp as yesterday, they closed up more than two percent. The NASDAQ set the pace, advancing 2.94 percent. Yet the indices have not recovered their position of last Friday; they have not yet overcome Mondays huge losses.
While these large fluctuations, first up and then down, have become increasingly common lately, they are, nevertheless, not unique to the current market. Tabulating the 14,817 trading days since the start of 1950, to generate just two derivative series for the S&P500, provides some insight into price formation and the predominance of seesaw closes. Where seesaws mean that large and opposite changes in prices occur often.
Consider two derivatives of daily price change: first, the sum of the last five days percentage changes, and second the sum of the last ten days price changes. In comparing the size of their changes, the expectation is that the sum of ten days changes is greater than the sum of five days changes. While this is true on the negative side the smallest total for the ten-day cycle is -36.7 percent but only -31.5 percent for the five-day sum- the opposite situation exists for largest positive accumulation. The five-day extreme is 18.7 percent but only 15.4 percent for the ten-day sum.
In short, the longer the fluctuations continue, the deeper is the decline and the smaller is the gain. On the other hand, the historical fact that the five-day total generates smaller negative and greater positive sums, implies that longer seesaws result in deeper, cumulative losses.
DJIA 2.05 percent
NASDAQ 2.94 percent
S&P500 2.58 percent