Monday, June 3, 2013

How the Market has Historically Reacted to Very Bad Fridays (Updated)

The study below is one I last showed in the October 22, 2012 blog.  It examines large drops on Fridays.  Both the Crash of ’29 and the Crash of ’87 happened on Monday.  The Crash of ’87 is still remembered by many traders that are active today.  There was a strong selloff on Friday and then all hell broke loose on Monday.  But since then strong Friday selloffs have commonly been followed by bounces on Mondays.  Perhaps this is due to the fact that fear of a crash causes what might otherwise be an ordinary selloff to become exaggerated and overdone on Fridays.  Or perhaps it is just that people don’t want to hold over the weekend (and end up paying a premium not to).  Whatever the reason, the tendency to bounce has been very strong.  I’ve updated that 10/22/12 study below.

The numbers here are all very impressive and suggest a strong bullish bias.  Traders may also want to take notice of the note at the bottom of the table.  A failure to bounce today could be a warning that the market is not following historical norms and the environment is becoming more dangerous.

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