Acceleration Matters: The Ups and Downs of the S&P
Here’s a look at some historical data of the S&P 500 since 1950.
The day after a down day, the S&P 500 has dropped at annualized rate of 12%. The day after that, it’s risen at an annualized rate of 11.3%.
The day after an up day, the S&P 500 has climbed at an annualized rate of 27.9%. The day after that, it’s risen at an annualized rate of 4.3%.
So in both cases we see a reversion to the long-term trend, and interestingly, both show next-day adjustments of about 23%.
After two consecutive down days, on the third day, the market drops at an annualized rate of 8.5%. But if the second day’s drop is greater than the first day’s, then the third-day loss is at an annualized rate of 17.8%. If the second day’s drop is less then first, then the third day shows a small annualized gain of 4%.
After two consecutive up days, the market rises at annualized rate of 21.8% on the third day. Here’s comes the kicker: If the second day’s gain is greater than the first, then the market gains an annualized rate of 42.2% on the third day. If the second day’s gain is less than the first, the third day’s gain is just 5.6%.
Acceleration matters, but it’s not everything. Turnarounds are also very good.
When the market goes down, then up, the third day’s gain is an annualized 36.6%. In fact, that represents nearly the entire gain of the stock market even though those days come about less than one-quarter of the time.
On down-then-up occasions, when the second day’s gain is greater than the first day’s loss, then the third day gains an annualized 49.8%. When the second day’s gain is less than the first day’s loss, the third day gains merely 24.1% annualized.
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