What History Tells Us About Monday’s Crazy Stock Market Reversal

What History Tells Us About Monday’s Crazy Stock Market Reversal
Andrew Rummer

about 2 years ago1 min

Something very rare happened in the US stock market on Monday: indexes that were deep in the red at lunch time in New York rallied hard through the afternoon and managed to close slightly up for the day. 

According to data from Bespoke Investment Group, it was just the sixth time since 1988 that the tech-focused Nasdaq Composite Index erased a drop of more than 4% to end the day in the green. The chart above shows the Nasdaq Composite on a log scale – so earlier moves are more easily visible – with pink circles indicating the previous five reversals.

Looking at the chart, four out of the five occurred at times of great market stress, during the grinding push lower following the dot-com bubble and during the sharper sell-off that accompanied the 2008 financial crisis.

History suggests that such swings don’t bode well for the immediate future, with the Nasdaq dropping by an average of 6% over the next month and 8% over the next three months. But while the true bottom may be a ways away yet, the longer term picture from past reversals has been more positive: the Nasdaq rose by 11% on average in the year following the previous five occurrences.

Historical Nasdaq moves

With Nasdaq 100 Index futures down 1.3% as of 6:15am in New York on Tuesday, it appears that investors are so far focused on the negative. We may yet have some more wild days in store.



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