Friday, August 28, 2015

Yet another unexplained 2 day rally in the S&P 500

Back in December of 2014 I took a bit of time to analyze the biggest 2 day rallies in the S&P 500 using daily prices from January 1940 to December 28th, 2014. I made a decision to ignore the 1929-1939 "Great Depression" period as the volatility experienced in the stock market at that time completely dominated the data set and I figured 75 years of daily prices was a sufficient sample size.

That blog post can be found here -

After crunching through the data, I came up with the following summary:

As you can see, the majority of the larger 2 day rallies had some form of catalyst or cause - be it a declaration of war, a currency crisis or the volatility during the popping of a bubble. I admitted that the "unknown" category was more a function of my lack of access to news, and (ahem, laziness) than it was these 14 days not having an explanation (I do these posts on my 'free time'... which is scarce).

Given the massive rally we just witnessed over the last few days of August - I thought I'd go back and revisit this data set to see how the August 25th to 27th rally measured up. It was impressive - 

it ranked 21st out of 19,021 two day rallies - about a 4.6 sigma event. Wow.

This rally is even more impressive when you consider the other characteristics of large 2 day rallies:

It happened absent a typical mitigating factor such as a currency crisis, a popping stock market bubble, a recession or the outbreak of a large scale war. At best you 'could' suggest that the initial 1089 point drop (or 6.6%) in the Dow on the morning of August 24th was a Crash - something similar to the Crash of 1987, but I would remind readers that the Dow managed to recover 501 of those points and only closed down 588, or 3.57%. Even at its' worst this 1089, 6.6% intraday low can not compare to decline of 22.61% in a single day - it can't even break into the top 20 list of single day declines in Dow history (going back to 1899).

I pulled off a revised "Top 30" two day rallies of all time (going back to January 1940) - and listed the catalyst for each one (Crisis, bubble volatility, war, etc). All of the largest two day rallies rallies seem to have an explanation except for one (in red) - which I find very interesting.

So, the next time someone tells you that the rally from August 25th to 27th was a "no brainer"  and should have been expected, mention that the rally was a 4.6 sigma event that ranked 21st out of a total of 19,021 two day rallies dating back to January 1940. It was also a rally environment completely void of any of your typical market chaos. In a nutshell it was hardly "business as usual".

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