What Happens When the Dow Is Down Eight Days in a Row?

(To read Todd Harrison's thoughts about how it is now or never for bulls, click here.) Of the 25 different groups, the Dow rallied by at least 6.2% in 21 of the cases. However, four times it did not. Let's focus on those right away: 1912: The Dow saw a 3.8% bounce over the next 29 days. 1931: (April) The Dow went up 2% over the next eight days. 1966: The Dow went up 1.1% in about six weeks. 1977: The Dow went up 3.2% in about 2.5 weeks. The above instances are the “worst case” scenarios. All experienced at least a 1.1% rally and all rallies lasted at least eight days. After the tepid rally attempts, stocks then proceeded to decline rather substantially. There were three other times where the Dow rallied more than 6.2% but not quite 10%. These rallies lasted from two to four months. Those proficient at math may deduce the other 18 of the 25 groups saw a double-digit rally in the Dow. Many of these rallies were quite dramatic and near major inflection points. For example, the signal in August 1982 kicked off the great secular bull market in stocks. While the September 21, 2001, signal did not herald a new bull market, it was the day of the exact low before a 35% bear market rally which lasted five and a half months. So this indicator in isolation is suggesting a 16% probability of a very weak bounce, a 12% probability of a respectable 6-9% bounce for two to four months and a 72% chance of a double-digit move. This indicator isn't particularly helpful in determining the strength or duration of the bounce. However, the indicator does suggest that there will be a better exit point in the intermediate future where you will be able to get out of your stocks if you are becoming increasingly concerned about a possible recession. While hardcore quants would like to go over all 25 times, that would be a bit much for a mainstream article on the Dow. Having said that, it still could be helpful to go over the last 10 times the Dow was down eight days in a row to give you an idea of the various types of scenarios. It should serve as a decent sample size. The Dow's listed performance was from the close of the eighth down day in a row to the intraday high of the subsequent rally. October 10, 2008: Dow went up 17.4% in 4 days. September 21, 2001: Dow went up 35% in about 3.5 months. May 9, 1989: Dow went up 27.5% in 14.3 months. August 12, 1982: Dow went up 253% over the next 5 years. July 6, 1981: Dow went up 1.6% over the next 11 days. February 21, 1978: Dow went up 37.5% over the next 3.2 years. March 28, 1977: Dow went up 3.2% in about 2.5 weeks. October 1, 1974: Dow went up 69% in less than 2 years. August 19, 1974: Dow went up 42% in a little over 2 years. October 22, 1971: Dow went up 25% in about 1.3 years. To read the rest, head over to Minyanville.

(To see Jeffrey Cooper's story about market panic, click here.)

(To view Atlantic Capital Management's article on how the debt ceiling deal makes a soft patch seem more likely, click here.)