History of Giant Intraday Reversals
The intraday rally following the market’s gut-wrenching plunge was one for the history books, but the balance of evidence that's emerging is bearish. Huge reversal days are rare enough that investors pay them outsized attention — making it easy to cherry-pick both bullish and bearish cases. There are only six historical precedents for the Nasdaq dropping 4% or more and closing higher — in data spanning about 34 years. The 2008 reversals followed the Lehman Brothers failure, which kicked off the Global Financial Crisis. Stocks wouldn't bottom until much lower when the Fed upped QE1 the following March. In 2000 and 2002, the about-faces occurred in the wake of the tech bubble crash. Neither of those reversals led to a tradable bottom. Finally, the reversal on Oct. 28, 1997 — in the midst of the Asian Currency Crisis — did result in a bottom in the Nasdaq that was successfully tested the following January, leading to fresh record highs. Going back to 1929, which expands the sample size but remains admittedly small, we looked at days where the Dow was down 3% or more and closed down no more than 0.5%. The average loss after a reversal day over the 13 events is 13.36%, with a median of 6.72%. But the data vary wildly. What stands out are the falling knife events going back to the Great Depression. Before stocks peaked in 1929, there was a tradable reversal in March of that year. Notably this was during the Fed's Roaring '20s' easy-money era that was about to come to a swift end. The following reversal day occurred in November 1929 after the Dow was already down nearly 40%. It would go on to lose another 83% until the bottom — finally reaching new highs 6,256 trading days later in 1954. Aside from that egregious example, the data still suggest caution. Despite the shellacking tech stocks have taken this year, retail investors had been buying in droves. Morgan Stanley notes that back-to-back selling days are rare during the pandemic. But according to JPMorgan, the floodgates opened during the intraday slide, when retail dumped $1.36 billion in stock. Stifel Chief Equity Strategist Barry Banister says there's more downside in the indexes until five signs appear — none of which are currently flashing green. Number one on that list is the Federal Reserve turning more dovish — which he argues is unlikely before the first rate increase. He also needs to see the U.S. PMI manufacturing index bottom (unlikely before the end of this quarter), global M2 money supply bottom, strength in U.S. earnings beats versus misses, and a quelling of tensions with Russia over the Ukraine. He points to the $5.8 trillion appropriated over the first year of the pandemic — which exceeds the combined cost of World War II, the Marshall Plan, and the response to the Global Financial Crisis. "The spending at the fiscal level during COVID was just excessive," he said.