Large, one-day moves create a great deal of excitement. When prices rise sharply, you can feel the burst of energy it creates as analysts and financial market journalists excitedly tell us the good news as to why prices rose. And, they usually go further by saying that today’s big move up is likely to lead to a further rise in prices.
When prices drop significantly, the opposite is true. Bad economic news, poor earnings and negative outlooks all become part of the nightly equation as to why prices dropped. And, this negative psychology many times tends to them manifest itself in justifying why the outlook for the stock market is poor.
However, based on our research, it appears that large market drops are followed by immediate snap back moves. This is especially true during the times the S&P 500 has traded above its 200-day moving average. After the panic has set in and the selling is finished, the market many times has quickly recovered and these recoveries are often strong.
The above is from How Markets Really Work: A Quantitative Guide to Stock Market Behavior by Larry Connors, founder and chairman of TradingMarkets, home of PowerRatings, and Connors Group, developers of The Machine.