Market Forecast: Dreary with Occasional Upside Snaps By Dr. Van Tharp Trading Education Institute
A quick quiz: Since 1993 (when the S&P 500 ETF, SPY started trading), when have the biggest up days happened in the markets? Some logical choices might be during the run-up to the Internet Bubble in 2000 or the run up to the Real Estate and Credit Bubble of 2007.
But if you've read articles in this space for any length of time, you know that I write a lot about the importance of monitoring the volatility in the market and in particular, the volatility in the instruments you trade. In fact, I've written 15 articles since 2008 for this very space with the word "volatility" in the title!
And if you've read any of those articles, you'll know that big-time volatility happens in down markets. Here's the real kicker:
*** Huge up days happen almost exclusively in down markets. ***
I know that that you're not going to just take my word for it, so don't worry. As usual, I've brought the numbers with me to back up that bold (and bolded) statement. Let's jump in and see how 19 out of 20 of the biggest up days since 1993 were relief rallies during market swoons.
The Numbers, It's Always About the Numbers
After slogging through the data and comparing every daily percent change in SPY, here are some number facts about the biggest up day and down day on record since the inception in January of 1993 of the S&P 500 Index based ETF:
SPY's biggest single up day: +14.52%, October 13, 2008
This happened the day after the market finished having one if its biggest collapses in history losing 34.4% in just 16 trading days.
The second biggest one-day gain happened just a couple of weeks later - an 11.69% jump on October 28, 2008.
The biggest down day of the last 23 years? Not surprisingly, it was October 15, 2008 when SPY lost 9.84% in a day.
Now let's look at all 20 of the biggest up days of the last 23 years
The Real Estate and Credit Bubble Collapse: Biggest gain numbers: 1 - 6, 8, 11 and 18 (nine in all) happened in the five-month period of October 2008 to March 2009 during the bottoming process in the biggest down market since the Great Depression.
The Internet Bubble Bursting: Biggest gain numbers 7, and 14 - 17 (five in all) happened in 2001 and 2002 during the bear market that followed the Internet Bubble.
The Long Term Capital Management Financial Scare: Biggest gains numbers 12 and 13 came as rebounds during the demise LTCM and the global scare that resulted in September and October of 1998.
The Asian Currency Crisis: Biggest gain number 10 came as a rebound from the currency crisis in 1997 known as the "Asian Contagion".
The S&P Downgrade of U.S. Credit & the European Debt Crisis Kick-off: Biggest gain number 20 came near the end of the rapid drop in August 2011 that followed the downgrade of U.S. Sovereign debt.
During the Internet Bubble: The last two are a bit of a gray area, coming in the first quarter of 2000. Biggest gain number 19 came just 6 trading days before the S&P 500's March 24th top. However, it resulted from the January - February correction (-10.4%) and so can easily be classified as a relief rally from a market drop.
Biggest gain number 9 came on January 7th, 2000 as a response to a three-day 7.5% pullback that happened to kick-off the New Year. I believe this is the only daily gain in the top 20 biggest gains that can be classified as happening during flat or up market conditions.
There you have it - 19 of our 20 biggest up days all happened as pops immediately after or during significant market drops.
As we remain in corrective market territory, don't be surprised to see aggressive rips to the upside. And because of the global macroeconomic problems that we discussed last week, don't get your hopes up for an easy recovery out of these lower levels any time soon.
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