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“Based on yesterday’s large gain in the stock market, is the bottom of the market in?”

Today’s question deals with controlling emotion, the fear of missing out, and large moves in the stock market.

The question is:

“Based on yesterday’s large gain in the stock market, is the bottom of the market in?”

 



Transcript: Is a Big Gain a Sign of a Stock Market Bottom?

It is easy to understand why this question was asked yesterday. The stock market had a very rough October and November, falling a little more than 10% so far. Investors have no doubt been wondering when to get in and invest. But its always hard to buy when the market is falling. When the market is falling, you always want to wait another day to see if the market goes down more.

So you have probably been thinking about buying, and then a big day like yesterday comes where the stock market rises 600+ points. Now you have “FOMO” – Fear of missing out. You kick yourself because you were thinking about buying….now you think of all the gains that could have been yours!

 

But, are large up days in the stock market really a sign to buy?

 

I looked back at the best 20 days in the dow jones industrial average history. And then found the future prices of the market 30, 60, and 90 days later.

Exactly half the time, the market was lower 30 and 60 days after these large gains in the stock market.

12 out of 20 times the stock market was lower 90 days later than where it closed after the big one day gain.



Now, yesterday was no where close to one of the best days in history. So maybe this rule doesn’t apply in this case. But I thought it was interesting that more often than not, a very large move up in the stock market has been a sign that the market will head lower in the next few months.

dow_after_big_one_day_gains.png

Of course, the best way to invest during volatile times like we see now is to just stick to your plan. If you are investing regularly, whether that be monthly, quarterly, yearly, etc. Keep investing. Don’t let one day change your long term plan.

But if you can’t help but kick yourself for missing out on yesterday’s gains – fear not, as its unlikely it means anything significant one way or another.

Matt Hylland