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“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.
Now, to be sure, there were many instances where panic selling was followed by more selling. Maybe that will happen this time around as well. I don’t know. All I know is that the evidence suggests the odds of that happening are lower following days of panic selling than other days. So you should have been more afraid of selling yesterday, before the panic selling, then today, after it has already occurred.
Which is a roundabout way of saying that instead of fearing panic, perhaps the more rational response as investors would be to embrace it. For it is panic that creates opportunity in markets.
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This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.
Charlie Bilello is the Director of Research at Pension Partners, LLC, an investment advisor that manages mutual funds and separate accounts. He is the co-author of four award-winning research papers on market anomalies and investing. Mr. Bilello is responsible for strategy development, investment research and communicating the firm’s investment themes and portfolio positioning to clients. Prior to joining Pension Partners, he was the Managing Member of Momentum Global Advisors and previously held positions as a Credit, Equity and Hedge Fund Analyst at billion dollar alternative investment firms.
Mr. Bilello holds a J.D. and M.B.A. in Finance and Accounting from Fordham University and a B.A. in Economics from Binghamton University. He is a Chartered Market Technician (CMT) and a Member of the Market Technicians Association. Mr. Bilello also holds the Certified Public Accountant (CPA) certificate.
You can follow Charlie on twitter here.
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