Thanks for sharing. Severe price drops are relatively common as the 42 identified incidents in 22 years demonstrates. Crashes are quite rare. the Monday, August 24 fell into a the mini crash grouping. The trouble with the gain phenomenon following a jolting drop is that it assumes new money available and no losses preceding the drop. My own experience with clients includes scores of episodes where committing additional capital and years of patience was required to recover. Enjoying the gains also requires a timely exit. In many cases the gains evaporated within relatively short time spans. Many observers love to cite 1987 as a classic example of buying the crash. Most of them ignore the painful period leading into October 1987 as well as the darkness prevailing on that October day when a 500 point Dow plunge translated to a full 20% cut rather than a 3-4% clipping. The memory of the experience is deeply etched into the mind and no one, absolutely no one was remotely interested in taking the buy side of any trade that day. All of us simply wanted to go home and hope that our friends and families did not disown us during the day. The current environment is particularly disturbing. The intermediary risk takers are far more absent from intervention activities. Market making is disdained as an evil. The specialist system is largely gutted. Proprietary trading is an anathema. The parties charged to exert energy and capital to maintaining and restoring balance during difficult periods are no longer acting in such capacity. Why should they? Acting as risk takers merely places capital at risk and draws public and regulatory scorn while producing inadequate returns on a consistent basis. No wonder Goldman Sachs seems inclined toward banking as a core operation versus capital market emphasis. Actually, it is unfortunate that Morgan Stanley is no longer able to occupy a central role in maintaining fair and orderly markets. I have no objection to ceding profit to MS in exchange for the service.

I'm not sure exactly what you mean. I assume: 1) the market has to gap open down 3.5% or lower--a gap open down 3% doesn't count; 2) you buy the open; 3) you hold the position for the next 5 days.

So on average, after 5 days, you see less than a 1% return?

Hi Tim,

Let me clarify. First, by gap down I meant, the distance from close to close. So in other words, market closed yesterday and then market close today. If the percentage change from previous close to current close exceeds a 3.5% drop, then, on average you would net about .8%.

I think the gap down you are referring to ( and most people will agree) is the percentage move from previous close to current open. The statistics for that are actually more rare for a 3.5% market movement. Since 1993, there has been only 5 occurrences when the market truly gapped down more than 3.5%. And then if you were to buy the close of that day and held the position for the next 5 days, you would had netted 18.8%! Average trade would be 3.8%.

* market gapped down 8%! 5 day return was -6.4%

* market gapped down 4.4%. 5 day return was 5%

* market gapped down 3.6%. 5 day return was 3%

* market gapped down 4%. 5 day return was 6%

* market gapped down 8%. 5 day return was 11%

Do let me know if you are interested in the excel sheet. I can email it to you.

Cheers,

Umair

Can you please email me your Xcel spreadsheet??

LanceTHazer at Yahoo

Sent

Hi Umair, could you please email me the excel sheet as well. adriankozameh at gmail. Thank you

Hi Umair

Could you email me the spreadsheet as well. Many thanks. Richard.

Trying to grasp the terminology covering the subject. The question; what constitutes a crash these days. It seems as though our collective low pain threshold allows the definition to include a series of 2-3 days composed of higher than normal deviations is termed as a crash or panic. In the historical context the recent experience falls far short of anything in the crash category. Following big breaks such as a series of 5% plus drops or something in the double digits taking the buy side is a relatively high risk gamble. The immediate result may appear productive but when does one sell? When to sell is consistently more important to assess than when to buy; win. lose or draw.

Hi Umair. Could you please email me the spreadsheet? Thanks!

Hi Umair , could you please email me the spreadsheet , thanks

Just a recap on this. 5 day return was 5%. Goes to show you.. People overreact. It has been proven time and time again.

Very interesting indeed