Thursday, March 20, 2008

Big Drop After A Big Up Day - A Rarity That Has Occured Near Bottoms

Last night I went through a host of studies that all led to bullish conclusions for the intermediate-term (10-30 days or so). Today the S&P 500 dropped 2.4% and the Nasdaq 2.6%.

The Explosive Moves off Bottoms study last night identified 10 instances where new lows were followed by 3.5% up days. The 5/27/70 instance continued higher without a short-term pullback. The 7/5/02 instance dropped lower and didn’t bounce for a long time. The other 8 instances all experienced a pullback within a few days before heading higher. The average pullback of those 8 instances was 2.6%. So the size of the pullback today isn’t alarming. I just wasn’t expecting it to happen all in one day.

I ran a test to see other times where the S&P 500 has risen 4% or more one day and then dropped 2.4% or more the day after. Being near a market low was not a requirement. Since 1960 it has only happened twice.

The first was October of 1987. (See red dot.)

The second time was October of 2002. (See red dot)

It’s difficult to extrapolate much from just two instances, but I found it interesting none the less that the only other times this has occurred was near major market bottoms. One caveat is that today’s decline came on higher volume while in 1987 and 2002 it came on lower volume. Hopefully today will keep enough people on the bearish side that the rally can take hold. Investors Intelligence saw a slight drop in bulls to 30.9% and a slight rise in bears to 44.7% making that index even more extreme. Put/call ratios remain high and the VIX headed back up close to 30. My intermediate-term bullish bias has not changed.


Anonymous said...

Rob,thanks for your insightful research work.

i find it surprising that the 3rd instance occurred within 6 years of the last one (Oct. 2002) but then again we are in an interesting time for the stock market.

regards, Jimmy

Anonymous said...

also noticed that each of these 3 instances occurred the same time gold/silver stocks/PMs sold off sharply. unsure if this was the same for other commodities (as it is this past weeks) maybe someone can confirm for the other commodities (ex. energy, agriculture, livestock, base metals, currency, treasury.)

regards, Jimmy

Mike Sklut said...

I love the charts :) Good post.