Did Rare Event Signal Capitulation?

by Dana Lyons

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This week’s epic selloff included back-to-back 90% Down Days on the NYSE; was it the usual sign of capitulation?
Waterfall-type declines like we’ve seen in the stock market this past week typically end when the last holdouts give up, or capitulate. That makes sense since, if there is nobody left to sell, the market will stop dropping. One indicator that can, at times, mark capitulation at the end of a selloff is a “90% down day”. That is a day when an overwhelming percentage, i.e., 90%, of volume on the day goes to declining stocks. In other word, investors basically give up, or capitulate.
Given the unprecedentedly smooth ride in the stock market of late, it’s been awhile since we’ve seen a 90% down day – since September 2016, actually. At least, until this past week. And as a matter of fact, we saw a rare occurrence of back-to-back 90% down days last Friday and Monday. This is only the 17th such consecutive occurrence that we see in our database going back to 1965.

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The question is whether this event signaled capitulation or not. After all, capitulation typically comes after a more protracted decline. In this case, the 1st 90% down day actually closed within 2% of a 52-week high on the S&P 500. That’s unusual, but not unprecedented. 3 other times, we’ve seen similar circumstances: 9/29/1980, 4/10/2012 & 6/20/2013. Returns following those dates were a mixed bag. Thus, the jury is still out on whether or not the Friday-Monday consecutive 90% down days marked true capitulation or whether there is still substantial risk to be wrung out of this market.
In a Premium Post at The Lyons Share, we take a deeper dive into the historical instances of consecutive 90% down days and the resulting performance in the stock market to determine, as best we can, the odds that we have seen capitulation and that the lion’s share of selling is behind us.

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