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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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