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From CNBC:
A 4% one-day decline historically points to better gains, Jeff Hirsch says
A one-day decline of 4% or more may be brutal, but history shows that it can point to better gains in the following session and over the long-term, according to Jeff Hirsch at the Stock Trader’s Almanac.
The probability of a rebound on Wednesday after the previous session’s sell-off is roughly 66%, according to a Tuesday note from Hirsch.
“Since 1950, S&P 500 has declined 4% or more in a single day 53 times before today [Tuesday],” Hirsch wrote in a Tuesday note. “In those previous 53 occurrences, on the next trading day S&P 500 was higher 35 times and lower 18 with an average gain of 1.08% on all days. Based upon historical performance, the odds of a gain tomorrow [Wednesday] are 66.04%.”
History shows that stocks may not meaningfully recover losses in the near-term after a greater than 4% drop, but they can surge by double digits when investors look further out, according to the note.
?[The] line chart of the 30 trading days before and 60 trading days after the last 53 greater than 4% drops does not suggest any significant advance in the near-term as S&P 500 only managed a modest recover, on average over the next 20-25 trading days (a typical month is generally 21 trading days),” wrote Hirsch. “But ... S&P 500 was higher 82.7% of the time one year after a greater than 4% daily decline with an average gain over 25%."
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