Yesterday, we had a 4% drop in the NASDAQ-100 (NDX) and, not surprisingly, the 33 year historical record of 4% drops in the NDX suggests that a bounce is again likely to follow yesterday’s pain. What I found particularly interesting is that the bounce following a 4% NDX drop has a lifespan of only a month or so before any incremental gains revert back to the historical norm. In fact, the maximum post-bounce advantage peaks at about ten trading days, then slowly starts to erode. Looking at data from all 108 of those 4% drops, average performance begins to drop after the tenth day and is decidedly bearish during the period of 2-6 months after that 4% drop.
Part of the reason for this statistical bull trap is the relatively high number of 4% drops in the NDX that occurred during the 2000-2003 period (accounting for 75% of all 4% drops during the 33 year period under study), which lends a bearish cast to the data.
