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Market Declines
Was
the most recent market decline a major or moderate stock market
sell-off? If you were in a car struck by a speeding bus
the accident would feel severe no matter how any of the onlookers
described it. But major market declines don't happen very
frequently. How the most recent decline is labeled won't be
known for another handful of months. With a little luck it
could have the statistics of a major sell-off with a follow
through more closely akin of only a moderate decline. We have
a moderate decline in stock prices roughly every 12 to 18
months. The decline usually rebounds roughly half their decline
within 5 to 10 trading days, and recoups virtually all of
their losses within 30-40 trading days. The most recent
major decline that we are sure fits in that category occurred
October 1987. From October 5-19 the Dow dropped 34.2
percent, with an intra-day low of 1616. In the last three
days of the move the Dow dropped over 1000 points. The impact
of the decline of 1987 had two parts to it: the actual decline,
and the market's lackluster performance during the months
to follow. Unlike the reasonably rapid rebound of a moderate
market decline, in 1987 the market didn't climb back to its
pre-decline levels for 377 trading days.
Unlike the 1987 decline, the most
recent decline swallowed only a segment of the whole equities
market. The recent decline saw the NASDAQ Composite decline
from 4960 to 3265 in just 3 weeks, an eerily similar 34.1
percent. But during the same period the Dow actually rose
slightly except for the last 3 days when it dropped only 3
percent. The S&P 500 was also generally flat for the period
except the last 3 days when it declined 7.5 percent. Due to
the only partial decline of the whole market, and the larger
amount of money on the sidelines waiting to enter the market
than there was 13 years ago, we should see a rebound more
closely seen in moderate market declines.
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