Navigating the volatility

  • SPX down slightly yesterday after two-day rout
  • Nasdaq 100 (NDX) closed higher
  • Similar moves often followed by volatility, tests of sell-off lows...and rallies

Now that we’re a day removed from the US stock market’s worst two-day drop since August 2015, it’s time for a little perspective.

No doubt the Monday–Tuesday sell-off was nothing to sneeze at: The S&P 500 (SPX) fell 6.3%, its worst two-day sell-off since August 2015, and one of only 26 other two-day, 6%-or-larger declines since 1962.1 That’s pretty rare territory. The move dropped the SPX to its lowest point since early December:

Chart 1: S&P 500 (SPX), 9/12/19–2/26/20. S&P 500 (SPX) price chart. Big rally, big sell-off.

Source: Power E*TRADE

But given the SPX went on a scorching 17.3% rally between October 2 and February 19—the third-biggest rally of similar length in the past seven years—the market was certainly ripe for a setback. The wild card in this case is that the sell-off is tied to an emotionally-charged global virus outbreak that’s still playing out. (But for any long-term investors tuning in, remember—the SPX is still higher than its been on all but 52 days of its existence, and it’s less than 8% below its all-time high.)

For shorter-term traders, though, this week’s market dive provides some hard data to chew on. Although the historical record suggests more volatility is in store in the near-term—no surprise, there—the slightly longer-term picture indicates these sell-offs sometimes mark significant market turning points:

 ●While the SPX more often than not closed up the day after a large two-day sell-off (it didn’t yesterday), the next two days were, on average, the weakest of the first five: The SPX closed up on the second day only 10 out of 26 times (38%) and only 12 out of 26 times (46%) on the third day.

This suggests the market may test the sell-off low in the first few days after it—sometimes falling to a lower low—before potentially pushing higher. The following chart shows the two most recent down moves similar to this week’s—the SPX’s 6.1% drop on February 2–5, 2018 (left) and the 7% drop on August 21–24 (right):

S&P 500 (SPX), 1/8/18–3/13/18 (left) and 8/13/15–10/13/15 (right). S&P 500 (SPX) price chart. Sell-offs, tests, and rebounds.

Source: Power E*TRADE

In 2018, the SPX rallied the first day after the sell-off, but ultimately fell another 4.4% before rebounding. In 2015, the SPX rebounded almost immediately, but tested the sell-off low nearly five weeks later. One takeaway: No two cases are exactly alike, but the market often likes to test sell-off lows, sooner or later.

Overall, though, after five days (one week) the picture was more often than not bullish: The SPX was higher 20 out of 26 times (77% of the time) after five days, with an average gain of 3.3%. And 10, 15, and 20 days later, the index was still up at least 73% of the time.

A final twist: Not surprisingly, 10 of the big two-day sell-offs occurred during the 2008 financial crisis—a generational market event that doesn’t necessarily provide a good analog for current conditions. The following chart shows the SPX’s average returns five, 10, 15, and 20 days after all 26 of the two-day sell-offs (blue) and the 16 that didn’t occur in 2008 (green):

SPX average returns after two-day, 6%-plus sell-offs (1962–2020). Large 2-day drops often followed by strong rebounds.

Source: Power E*TRADE

Bottom line, remove 2008 and you see an even higher level of bullishness: 20 days later, for example, the SPX’s average return was nearly 5%, while the average including the 2008 results was less than 3%.

You never know when the market will take an unexpected turn, but having a historical compass sometimes shows even market “shocks” aren’t as random as they appear.

Today’s numbers (all times ET): Durable Goods Orders (8:30 a.m.), GDP (8:30 a.m.), Pending Home Sales Index (10 a.m.).

Today’s earnings include: Acceleron Pharma (XLRN), Best Buy (BBY), Big Lots (BIG), Beyond Meat (BYND), Baidu (BIDU), Occidental Petroleum (OXY), Dell Technologies (DELL), Keurig Dr Pepper (KDP), Trade Desk (TTD), Servicemaster (SERV), SunRun (RUN), VMware (VMW).


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1 S&P 500 closing prices, 1/1/1962 – 2/25/2020. Performance reflects returns after 6% or larger two-day declines that were not preceded by two-day declines of equal or larger size. Supporting document available upon request.

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