Will the Nasdaq Take a Mean Bounce?

Earlier this month I talked a little bit about the mean reverting bounce associated with a 3% one-day drop in the SPX in VIX Spikes and SPX Drops Are Not Necessarily Two Sides of the Same Coin.

 

Yesterday, we had a 4% drop in the NASDAQ-100 [NDX] and, not surprisingly, the 33-year historical record of 4% drops in the NDX suggests that a bounce is again likely to follow yesterday’s pain. What I found particularly interesting is that the bounce following a 4% NDX drop has a lifespan of only a month or so before any incremental gains revert back to the historical norm. In fact, the maximum post-bounce advantage peaks at about 10 trading days, then slowly starts to erode. Looking at data from all 108 of those 4% drops, average performance begins to drop after the tenth day and is decidedly bearish during the period of 2-6 months after that 4% drop.

 

Part of the reason for this statistical bull trap is the relatively high number of 4% drops in the NDX that occurred during the 2000-2003 period (accounting for 75% of all 4% drops during the 33-year period under study), which lends a bearish cast to the data.

Comments

[theobannion]

Great information, Bill. But speaking of the Naz, check out a chart of the NASDAQ composite's advances minus declines, cumulative, for about the last 10 years. It's been declining steadily throughout the last bull market!

Reminds me of the Big Bang. Of course, you weren't born yet, but I remember it well. Boy, was it noisy! And, now, 13.5 billion years later, the universe is still expanding. Like the Big Bang, the NASDAQ small fry are still collapsing, 6 years after the bubble burst, or 6 yrs BBBB (after the Big Bang of the Bursting Bubble).

By the way, if you have the time to respond - what kind of software do you need in order to derive that kind of data? Not the Big Bang, the Naz 4% stuff.

Best,
SOB.

[Will Rahal]

The NASDAQ will take a bounce but tha tis it: just a bounce.

On a relative basis business is in better shape than the consumer as evinced by a ratio I keep track of Business Investment expressesd as percentage of Durable Goods Orders.
This ratio keeps climbing but it is close to a relative peak suggesting that business will follow the consumer into recession.
The action in the stock market confirms this.

See
wrahal.blogspot.com/20...

[cynic69]

I think "bouncing" is baloney. The Nas is on a string with the price of crude. Experts are calling the oil situation "demand destruction". They might as well call it "market destruction". As the numbers of miles driven falls off so will the number layoffs will increase. This pathalogical circle is going to sink our economy and our stock market.