The Velocity at Which Markets Rise and Fall

This is a final follow up to our recent discussion (here and here) about the likelihood of big up/down days in bullish and bearish markets.

In this post, I want to show what the savvy among us should already know, that the market tends to fall much quicker then it rises.

In my previous two posts, I’ve been using the zig-zag approach pictured above (and described here) to define bullish and bearish trends in the market. I much prefer this approach to defining the trend over something like a trend-following indicator (ex. 50/200-day moving average crossovers) because we’re able to capture the actual trend at that moment in history, even if some indicator didn’t yet realize it.

Analysis

The table below shows the (geometric) average daily % change and standard deviation (of log returns) during the bullish and bearish periods in the chart above on the S&P 500 from 1960 to 03/10/2009.

Two significant observations here:

1. The average day during a down trend is more than twice as bad as the average day in an up trend is good (-0.17% vs +0.07%). In other words, the market tends to fall much faster than it rises.

2. The market has on average been about 60% more volatile during down trends than up trends (1.42% vs 0.86%). We’ve covered this in much more detail here.

Again, no big surprises…just another perspective.

One last fun fact: from the market’s peak on 10/09/2007 to the latest low on 03/09/2009, the average daily change was -0.24% with a standard deviation of 2.4%. That’s far sharper and more volatile than the average bear we’ve faced before.

Comments

[Dave Shafer:]

Interesting data. Not surprising though. Could the velocity of the down days be increased since there is no uptick rule?

Mar 26 08:44 AM

[Michael S:]

Perhaps, but I think this is much more a function of investor psychology than anything else. michael

Mar 26 11:51 AM

[Lotalolly:]

Mich,

Aren't you just defining gravity in the financial markets?

Mar 26 02:46 PM

[Big-P:]

The downside velocity is greater because people like Donald Luskin convince the public to buy at EXACTLY the wrong time and, as a result, they all puke positions simultaneously. Just look at his terrible calls and tell me I'm wrong-

donluskinisatool.blogs.../

Mar 26 09:41 PM

[AndrewBaker:]

I've noticed that when the VIX is higher, volatility shows itself mostly on the downside. Try comparing VXX (VIX short term futures ETN) with the S&P 500: there is a significant mirror image viewable. So, high VXX, lower S&P 500 (IMHO DYOR).

Mar 27 08:36 AM