Monday’s rip-your-face-off rally following the morning’s gut-wrenching plunge — when the Nasdaq Composite cratered 5% — was one for the history books.
Quant desks and equities analysts are still scrambling to make sense of the mother of all hammer candles in the major indexes. But the balance of evidence that’s emerging is favoring the bears — not the least of which is Tuesday’s nearly 3% sell-off in the Nasdaq Composite (^IXIC).
Huge reversal days are rare enough that investors pay them outsized attention — making it easy to cherry-pick both bullish and bearish cases. Bespoke Investment Group points out that there are only six historical precedents for the Nasdaq dropping 4% or more and closing higher — in data spanning about 34 years.
The 2008 reversals followed the Lehman Brothers failure, which kicked off the Global Financial Crisis. Stocks wouldn’t bottom until much lower when the Fed upped QE1 the following March. In 2000 and 2002, the about-faces occurred in the wake of the tech bubble crash. Neither of those reversals led to a tradable bottom. Finally, the reversal on Oct. 28, 1997 — in the midst of the Asian Currency Crisis — did result in a bottom in the Nasdaq that was successfully tested the following January, leading to fresh record highs.
Yahoo Finance analyzed daily data in the Dow going back to 1929, which expands the sample size but remains admittedly small. Specifically, we looked at days where the Dow was down 3% or more and closed down no more than 0.5%.
Big Dow Reversal Days — How Long to the Bottom?
The average loss after a reversal day over the 13 events is 13.36%, with a median of 6.72%. But the data vary wildly. What stands out are the falling knife events going back to the Great Depression.
Before stocks peaked in 1929, there was a tradable reversal in March of that year. Notably this was during the Fed’s Roaring ’20s’ easy-money era that was about to come to a swift end. The following reversal day occurred in November 1929 after the Dow was already down nearly 40%. It would go on to lose another 83% until the bottom —…