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90% Day? Not Apocalypse Now...

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Yesterday, 90% of the issues that traded on the NYSE closed lower than the previous day's close.

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I've heard from quite a few different sources about how yesterday's selling pressure, so soon after a new high in the major indices, is a sign of the apocalypse.

I like to look at history when these kinds of things happen, and for the most part that kind of analysis has been a good guide. So let's take a look at yesterday's crap-out and put it into an historical context to see if previous instances led to anything dramatic.

The biggest deal seems to be that yesterday was a "90%" day. There are various definitions of that, but for these purposes I'll keep it simple and just say that 90% of the issues that traded on the NYSE closed lower than the previous day's close.

Now let's look for any other 90% days that occurred while the S&P 500 closed within 3% of a 52-week high on the day prior to the 90% day. Like yesterday.

Since 1965, I can find eight other occurrences. Several of them looked exactly like the current pattern of a "false" breakout followed by a break below recent support, which triggered the stiff selling pressure.

Sadly for the doom-sayers, only one of those led to any kind of meaningful decline, and even that was somewhat temporary. Overall, the S&P 500 was positive one month later six of the eight times.

Three months later, it was positive all eight times, with an average return of +5.2%. The average maximum loss during those three months was -2.1% compared to an average maximum gain that was four times as large, at +8.4%. Only two of them suffered any more than an additional 2% loss during the next three months.

Just some info for the next time someone tells you that huge selling pressure coming off a new high is a bear-market signal. You might want to ask them to check their facts and get back to you.

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No positions in stocks mentioned.

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