Thursday, October 30, 2008

Overly Strong Reactions Are Often Overreactions

If you left 10 minutes early on Wednesday you missed a lot. The S&P lost over 3% from 3:50 to 4pm and was down over 4% before bouncing in the last minute. I looked back over the last 25 years to find other times the market dropped 3% or more in the last 10 minutes of the day. This was the 1st. Lowering the requirement to 2% unveiled 3 instances. They are listed below along with the next day’s performance:

10/19/87 – S&P rose 5.23% the next day.
9/29/08 – S&P rose 5.27% the next day.
10/27/08 – S&P rose 10.79% the next day.

This is too small a sample size to use for analysis, but a nice illustration of a simple adage. An overly strong reaction is often an overreaction.


Trader Kevin said...

S&P futures up 25 points as I write this. Looks like this edge is trying to become quantifiable.

How does it look if you lower the threshold to 1.5% or 1%?

Also, Rob, can we please get a CBI update? Thanks!

Unknown said...

Very interesting. Let's see what happens today, and I will also be a buyer of dips in the short term.

Anonymous said...

But you have to put that into perspective of one day before that index rose 10 %,. You cannot look at that in isolation. +10 % daily was also overreaction, this time to the upside so if you have first upside overreaction and then downside overreaction you are left with nothing :))

Anonymous said...

in the spirit of the above comment, have you thought of somehow normalizing the % that you are looking for? i.e. instead of an absolute "3%" move, how about looking at "x%" of the days range or 1day atr? (that "3%" move happens to be "what %" of the day's range)

thank you for your blog. always thought provoking and an interesting read.

Anonymous said...

Those dates look like they might represent days when the market crashed the entire day. If so, I would think the study loses a lot of relevance. Potentially apples to oranges.