What does a 3% market jump hold in store?  

May 10, 2010

 It is not often that the stock index manages to vault over 3% in a single day. It did so today. The Sensex jumped 3.35% from 16,769 to close at 17,330 at the end of the day. When such a move occurs, one is bound to take notice.

Moneylife decided to take a look back to figure out how many times this has happened previously and, more importantly, what has been the reaction the very next day. Did the index put on more gains or did it slide? What we found was very interesting.

Our study covers the period 2001-2010. In this period of 10 years, there have been 83 instances (excluding today) of the markets crossing the 3% threshold in one trading day. Out of these, there have been 47 instances when the markets have remained positive for the next successive trading day. This translates into a 57% chance that the market will witness a spike in tomorrow’s trading. Not much of a heartening statistic, but an indicator nonetheless that is mildly encouraging for the bulls. On these occasions, markets have gained up an average 1.63% on the following day, with a maximum gain of 6.41% and a minimum gain of 0.06%.

On the 36 occasions that the markets have turned negative on the following trading day after a 3% gain, the index has shed 1.52% on an average. The maximum fall on such occasions has been 6.61% while the minimum fall was 0.03%.

Today’s surge was driven solely by the supposed happy end to the financial woes of several European countries, specifically Greece. The unprecedented $900-billion bailout organised by the European Central Bank (ECB) and the International Monetary Fund (IMF) to rid the
eurozone of its debt plague have brought joy on the faces of investors worldwide.

One single day of rally has wiped out almost the entire 4% decline that markets witnessed last week. There is every chance that today’s feel-good factor will roll on to the next trading session. Don’t expect the markets to do a high-jump again, but at the time of writing this piece, the European markets were up a huge 5%-9% while S&P500 futures were up a massive 4.7% in premarket trading.— Moneylife Digital Team