- The average next-day return is 0.59% (but variability is high).
- 60% of next-day returns (27 of 45) are positive.
- The average next-day return is fairly consistent for subsamples when the index is above and below its 200-day SMA.
DJIA 4-Std Dev Big Down Days
Markets rallied the next day but fell back in a week
CXO Advisory warned against looking at averages of subsequent one-week returns because of overlapping instances of big down days. The table reflects the first instance of a big down day in a five day period and subsequent big down day weekly returns were ignored.
Interestingly, while the markets rose for the next day for big down days, the one-week return was not so encouraging. In all cases, the average and median returns, as well as percentage of positive weeks, underperformed our control sample of the Dow returns for our entire study period.
Monday was not a 4-standard deviation day
Despite the market carnage yesterday, Monday did not qualify as a 4-standard deviation day. The measure actually came in at -3.48. So I repeated the exercise by defining big down days as 3-standard deviations under the 1008-trading day average:
DJIA 3-Std Dev Big Down Days
Here the sample size grew to 170 from 59. The results were similar but not as strong. The one day return outperformed but the one-week returns were mixed.