Tested what has historically followed after the S&P500’s worst days. Here are the results.

So similar to my last post, I wanted to see what happens when an extreme price movement occurs. This time, I chose to look at the S&P500 specifically, and what happened after its worst days in history.

4 of those days happened this century so I decided to take a look at those. I attached their charts with the percentage change for the following 20 days. Here are my general findings:

1) So overall, if the S&P500 crashes in a single day, odds are it will see a short term rally to make up for those losses. Oct ‘08 recovered 3 days after the crash, Dec ‘08 recovered within 2 weeks, and Mar ‘20 recovered within the month.

2) Even though there was a clear recovery pattern in the short term, a big single day crash is not a reliable signal for neither a bull or bear run in the long term. The 2008 crashes were followed by continuous losses until March 2009, and the 2020 crashes were followed by one of the longest bull runs in history.

3) Also fun fact, 4 of the 10 biggest loss days for the S&P500 were in 2008 and 2020, and 4 out of the 10 biggest gain days were also around the same time. Just goes to show that the name of the game during those months wasn't losses or gains, it was volatility.

So the conclusion I drew from this is that if there is a big single day crash, there will likely be a reversal in the short term, but it is not a good indicator of what will happen in the long term.

Also full disclosure, these sort of extreme single day crashes are extremely rare so the sample size was really small, can't really say with confidence that this short-term reversal will always happen. That said, I did some research and this is actually a pretty well-recognized pattern called "short-term mean reversion", so at the very least this is a pattern that appears enough to be recognized as such.

Let me know if there's any other data points I should include to help drive further discussion in future posts, thanks!