For today, 8.4.2011, I have $SPX down -4.78% and SPY down -4.68%. Let’s take a look at other times this has happened to see what happened next.
First, let’s examine previous dates when $SPX and SPY lost as much or more than today. I’ve also included the performance for the next day, two days later, and three days later. Keep in mind that SPY is tradeable, where $SPX is not. Also, SPY represents more recent history versus the long-term history of $SPX.
Below is the same information presented in a different format. I think it helps to see what happens after the crash day. Start with each blue bar (CrashDay) and work to the right. Notice the relationship between the blue and red bars. The large -20% loss is Black Monday.
Finally, lets look at what has happened in the intermediate term, after a crash day.
The results assume one bought the close of the crash day and sold X days later, at the close. All trades are averaged to produce the graph.
- The next day after the crash day has averaged a positive return of >1.0%
- The second day has also averaged a positive return of >1.0%
- The third day has averaged a negative return of -0.77% and -0.25% for SPY and $SPX, respectively.
History has shown that the next day after the crash day tends to be positive. However, there are a few examples of the next day losing almost as much (or more, on Black Monday) as the crash day. I know many folks are concerned about what will happen tomorrow.
I want to be deadly serious here. The market is in an extremely precarious and dangerous place. People are scared and may panic more tomorrow. 2008-2009 is no doubt still fresh in the minds of many traders.
The chance that a large, extended move upward will develop any time soon is very very slim. If you choose to hold here and wait for a bounce, understand that you may only get one shot at unloading longs or getting short. If you miss the opportunity, the market could easily slide another 5-10%. It may do that anyway, without a bounce. Over the next few days and weeks, expect another move down and a test of the lows. Volatility will stay very high.
If you are not disciplined and in control of your emotions, this market is going to eat you alive. You must know what you are looking for and you must know what you will do when you see it happening.