Thursday, November 8, 2007

NASDAQ 100 Down 2 Days > 6%: What Happens Next?

As of the time of this post, the NASDAQ 100 (QQQQ) has declined more than 6% over the last two days alone. This last happened in August of 2002. I ran a quick scan over the last ten years to see what happens the next day when:

(a) The index is down two days in a row;
(b) The second day is down more than the first; and,
(c) The sum total is less than (more negative than) -6%.

Of the 38 instances, 24 were positive (63%) for a total gain of 56% (average of 1.5%). The maximum gain of 18.8% was set on 1/3/01, while the maximum loss of -7.3% occurred on 3/12/01. Talk about volatility! Next I loosened the rules, as follows:

(a) The index is down two days in a row; and,
(b) The sum total is less than -5%.

Of 103 instances, 58 were positive (56%) for a total gain of 55% (average of 0.5%). The maximum loss changed to -9.9%, which occurred on 8/31/98. A more thorough analysis might relate these statistics to the index's differential versus its 200-day moving average. I'm guessing that this wouldn't favor the current environment for the NASDAQ 100 with that index just coming off of recent highs. However, the picture may be quite different looking at the S&P 500, which has already breached its 200-day moving average. Can you say, "short QQQQ, long SPY?" Just a thought.

Speaking of which, be careful with the 200-day average of the S&P 500 having been breached out there gang. The behavior of the market can change dramatically when this happens favoring downside volatility.

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