A Word On Big Daily Stock Market Gains

October 14, 2008

Very large daily stock market gains are more likely to occur within bear markets than during times when equity prices have been trending upward.  The DJIA posted its fifth largest daily increase yesterday of 11.1%  and is indicated to rise sharply at the open today.  Asia and Europe have experienced similar strength this week, but equities remain sharply below end-September levels.  It is important not to over-judge sharp single-day reversals.  Five of the other nine top-ten increases in the DJIA were recorded during the Great Depression.  The DOW peaked at an intra-day high of 386.1 on September 3, 1929 and bottomed at an intra-day low of 40.56 on July 8, 1932, a net drop of 89.5%.  The five very large increases during that mother of all bear markets occurred on October 6, 1931 (+14.9%), October 30, 1929 (+12.3%), February 11, 1932 (+9.5%), November 14, 1929 (+9.4%), and December 18, 1931 (+9.4%).  The extensive decline of the Japanese Nikkei index during the early 1990’s was similarly interrupted by occasional very large daily advances. It takes more than a day or two of counter-trend movement to establish a trend reversal of stock prices or any market or real economic data trends for that matter.  In light of a severe recession that still lies ahead, it pays to remain guarded about whether stock prices have bottomed out yet.


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