Profiling a sell-off
- Market quieter, but soft, after Wednesday sell-off
- SPX’s second-largest down day of past two years
- Next day’s close important for short-term momentum?
Even if the Cboe Volatility Index (VIX) hinted at the potential for market weakness, Wednesday’s -3% S&P 500 (SPX) sell-off probably caught most traders off guard, even those who thought the market wouldn’t like the outcome of the final Fed policy meeting of the year:
Source: Power E*TRADE. (For illustrative purposes. Not a recommendation. Note: It is not possible to invest directly in an index.)
After trading higher for most of the day, the SPX dropped late in the session to close slightly lower. That’s a departure from its behavior after the three other big down days since early September (circled), all of which were followed by up days that traded entirely within the range of the sell-off day.
A handful of recent examples don’t necessarily provide useful insights into price action, though. To do that, we need to broaden our scope a bit. The following chart shows the SPX’s median returns one, five, 10 and 20 trading days after all the other sell-offs like Wednesday’s that have occurred since 1957:1
Source (data): Power E*TRADE. (For illustrative purposes. Not a recommendation. Note: It is not possible to invest directly in an index.)
For a more-rounded perspective, the chart uses three definitions of “sell-offs like Wednesday’s”:
• All 2.5%-3.5% sell-off days (green columns, 145 examples)
• Only 2.5%-3.5% sell-offs that were also the lowest close in at least 20 trading days (blue columns, 81 examples)
• Only 2.5%-3.5% sell-offs that occurred six to 10 trading days after the highest close in at least 20 trading days (purple columns, 30 examples).
Regardless of how we define Wednesday’s price action, the SPX’s median return was positive at each of the intervals. So, again, we see the SPX’s behavior yesterday was out of step with its historical norms. Also, for the 30 examples that arguably most closely resembled Wednesday’s move (sell-off days that occurred not long after a 20-day-or-longer high, purple), after five days the SPX was higher just two more times than it was lower (16 vs. 14), and in one instance it had fallen an additional 15.4%.
Also, there a noticeable difference when the SPX closed lower rather than higher after one of the big sell-off days. Of the 16 times it closed higher the next day, it gained ground over the next 10 trading days 10 times. But of the 14 times it closed lower the next day, it was higher 10 days later only five times.
In other words, days like Wednesday often signal there’s more volatility in store for the market, regardless of whether bulls or bears ultimately gain control.
Today’s numbers include (all times ET): Quarterly expiration (stock options, index options, stock index futures), Personal Income and Outlays (8:30 a.m.), PCE Price Index (8:30 a.m.), consumer sentiment (10 a.m.).
Today’s earnings include: Winnebago (WGO).
Click here to log on to your account or learn more about E*TRADE's trading platforms, or follow the Company on Twitter, @ETRADE, for useful trading and investing insights.
1 All figures reflect S&P 500 (SPX) daily prices, 1957-2024. Supporting document available upon request.