Sunday, February 15, 2015

300-point days: good or bad?

If you’re bullish on stocks, root against a huge gain in the Dow today.

When the Dow Jones Industrial Average screamed higher by 305 points Tuesday, reclaiming a nice slug of January’s losses, it was the second one-day spurt of more than 300 points in 2015, and the third in two months.

It’s tempting to see these buying frenzies as evidence of underlying market health -- signs of powerful demand for stocks unleashed as soon as unnerving distractions like crashing oil prices or European debt negotiations recede.

Yet such quicksilver jumps aren’t what long-term market optimists should wish to see very often. They tend to appear in a skittish tape in a climate of low investor conviction, and result not from big investors being caught wrong-footed by a stray headline or sudden price blips.

More generally, big gains in the market in a single day are not particularly representative of how strong bull-market advances work. Across all of market history, large single-day moves either up or down tend to be clustered in bear markets, near market bottoms and, to a lesser degree, near market tops.

The meat of a long market advance typically looks like a long upward grid of smallish successive gains and brief, trivial pullbacks, reminiscent of the New England Patriots monotonous attack of disciplined short passes rather than Hail Mary downfield gambits.

The relentless rally of 2013 is an ideal example of the gentle glide path of a well-scripted advance. On the way to a 30% rise in the Standard & Poor’s 500 that year, there were a few month-long stretches when the index failed to move as much as 1% in a day.

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