Big One-Day Gains Far From Bullish, History Shows

Some recent 5% jumps on the Nasdaq suggest stocks could be bedridden for some time.
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The rebound in stocks has eased a lot of shoulders on Wall Street. But history suggests that the sharpness of the bounceback may itself be a cause for worry.

The Nasdaq Composite, for instance, has gained 20% from its Sept. 21 nadir, helped along by some big up days. On Sept. 24 the tech-heavy index gained 5.4%, and on Oct. 1 it tacked on 5.9%.

But nice as it is to see an index return more in a day than the benchmark 10-year Treasury gives back in a year, the fact is that looking back through time shows the biggest one-day rallies have typically occurred in the midst of bear markets.

The Nasdaq, points out Tom McManus, equity portfolio strategist for Banc of America Securities, has had 27 days since 1986 when it has gained in excess of 5%. Of those, 21 have been since the index's peak in March 2000. The other 5%-plus days happened in the fall of 1987 and the fall of 1998. On only one occasion, Oct. 9, 1998, were investors getting prices that they couldn't get later.

Big Rallies Aren't a Big Reason to Buy
Five percent moves in the Nasdaq (blue marks) aren't buy signals.

Source: Nasdaq

Source: Nasdaq

Source: Nasdaq

Nine of the Dow Jones Industrial Average's 10 biggest one-day percentage gains happened in the years that followed the 1929 crash. (The remaining one was in 1987.) All but two of those days came before the Dow bottomed in mid-1932. Of the two rallies that came after the Dow's absolute bottom, investors would find that stocks dipped anew and that the bargain-basement sale they thought they'd missed out on would come again.

"We shouldn't become more bullish when we get the misleading reassurance of a sharp up day," says McManus. He has, in fact, gotten less bullish in part because of the big bounce off the lows, reducing the equity exposure in his model portfolio to 65% from 70% last week. He'd increased his weighting to 65% from 60% on Sept. 20 and to 70% from 65% on Sept. 21. (Yes, he's a busy guy.)

The problem with the big rally days, besides their history of leading to nothing good, is that they suggest that investors are terribly worried about "missing" the bottom (and also that shorts are terribly worried about locking in gains). Typically, the beginning of a new bull market is characterized by a distrust in stocks and a lack of interest. As the move progresses, investors only cautiously add to positions; this is what the old saying that bull markets "climb a wall of worry" means. The one-day moves we've had, says Lehman Brothers technical analyst Jeff deGraaf, "don't suggest a howling new bull dynamic."

More importantly, rather than worrying about whether the bottom has come, investors should probably just remember that when the bull market does come again, there will be plenty of time. It will not be like the latter stages of the bubble, when each day you didn't have money in the market felt like a lost opportunity.

"What's remarkable about the bull market we enjoyed since the early '80s," notes McManus, "is that you really didn't need to be buying at the lows to make money."