From Pension Partners, Sept. 9:
“I tend to stay with the panic. I embrace the panic.” – Larry David
The stock market was down today. That fact alone is not at all
unusual (47% of all days are negative historically). What was somewhat
unusual is the aggressiveness of the selling in today’s session, what
some would refer to as “panic selling.”
Panic selling is a subjective term but there are various metrics one
can use to help identify it in an objective fashion. One of those
metrics is measuring the declining volume in the NYSE over the total
volume. When it exceeds 90% (a “90% downside day”), you have panic
selling in my view. We have data on this going back to 1970 and such
days occur less than 1.5% of the time (3-4 times/year on average).
Yes, there are varying degrees of panic. On October 19, 1987, the
S&P 500 declined over 20%, its worst single-day decline in history.
On Black Monday, downside volume was 99.7% of total volume, the highest
in history. Today the ratio came in at 96.8% which is quite high (25th highest since 1970 out of 11,775 trading days) but with the S&P 500 down only 2.4%, it was far from a 1987-style crash.
The temptation for traders/investors after such a day is
obvious: sell. The headlines are negative, sentiment is pessimistic, and
we are wired to assume that only more bad news/returns will come (recency bias).
And has that assumption been correct historically?
On average, no. In fact, just the opposite is true. Since 1970, the
average returns following 90%+ downside days are not only positive but
higher than your typical day. It is higher not only the following day
but also the following month and year. And as the second table below
illustrates, it is more likely to be positive as well....MORE
