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What Happens After A Crash?

September 4, 2015

What Happens After A Crash?

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Our posts this week have dealt with analyzing the aftermath of the recent historic events that have unfolded in the stock market. However, of all the worthy topics that we have addressed, we have not directly addressed the most important one: the “post-crash” environment. Seeing as though the dramatic market decline in the latter half of August was the tremor from which all other price action has resulted, it stands to reason that we take a good look at it directly. In other words, how has the market historically behaved following similar “crashes”.

We put quotation marks around the word crash as the term is obviously open for interpretation. Certainly anyone who experienced the October 1987 events would be hard pressed to call anything since then a “crash”. However, for the sake of this study we are going to call the recent decline, and any similar such historical selloff, a “crash”. Specifically, we looked at all times in the S&P 500 since 1950 in which the index dropped at least 10% within 10 days (credit to fellow advisor and friend, Paul Schatz [@Paul_Schatz on Twitter] for the concept).

As it turns out, we identified 11 prior unique crash occurrences. By unique, I mean we eliminated any successive crashes and any crashes that were within the confines of a retest of a prior crash. Among the 11, 2 of them – July 1974 and September 2008 – continued to cascade lower, nearly unabated, for several more months. The other 9 resulted in an initial low in relatively short order. By initial low, we mean the first step within a market bottoming process. Those 9 are the subject of today’s Chart Of The Day, and this post. These are the months containing the 9 dates:

  • May 1962
  • May 1970
  • October 1987
  • August 1998
  • April 2000
  • March 2001
  • September 2001
  • July 2002
  • August 2011

 

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