What Monday's Big Drop Means for the S&P 500 Index

The S&P 500 Index (SPX) caught the Street off-guard on Monday when it plunged 2%

Senior Quantitative Analyst
Jul 1, 2015 at 7:00 AM
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Monday ended up being the largest single-day drop in the S&P 500 Index (SPX) in over a year (April 2014, to be exact). What made it so alarming is that we aren't used to it. The market has been so quiet over the past few years, steadily notching new highs. This week, I'll take a look at how the market has performed in the past after big drops during similar market environments.

2% Drops Since 2012: The table below shows all the times the S&P 500 fell by more than 2% since 2012. As you would expect, knowing the market has been moving steadily higher since then, the index has by and large quickly recovered from the losses. In every instance below, the market moved higher over the next month of trading.


These next tables summarize the returns in the table above, and compares them to how the market has typically performed since 2012. Over the past few years, a trader would have done quite well buying these big single-day pullbacks.


2% Drops in a Steady Market: The 2% fall on Monday was the first 2% move of the year. The last time the S&P 500 moved 2% in a day was December 2014, when it moved higher by more than 2% two days in a row. In other words, this has been a pretty quiet market as of late. The first table below shows prior instances when the index went at least six months without a daily move of 2% or more, and then fell by at least that amount. For this study, I went back to 1950. The second table below shows anytime returns for comparison.

The returns following these occurrences are pretty bullish. The average and median returns, and the percent positive, all beat the anytime returns.


Finally, I broke it down one more way. The drop occurred near an all-time high on the S&P 500 Index. Out of the 20 returns in the table above, 12 of them occurred when the index was within 5% of an all-time high. Those returns are summarized below, and are even better during these times. In the past, during similar market environments, a sudden 2% pullback has been a pretty good buying opportunity. Hopefully, this one follows that tendency.



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