The recent sharp drop in the stock market is a rare event. Drops of this type are usually followed by UP quarters.

Setting aside all valuation factors and fears that Europe will go into a black hole and take us all with them (doubtful), we can look at prior panic attacks in the market and see what happened next.  At the moment we are experiencing an emotional event more than a rational event.  Since 1970 there have been only 8 occasions (out of 167 data points) when the S&P 500 has dropped by 14% or more in a single quarter.  The S&P 500 is now down 14.9% for the current quarter. The average drop in these panic stricken quarters has been 19% so we may see some more downside if we are to reach the average.  That’s the bad news.  The good news is that the quarter following panics has been UP in 86% of the cases – that’s only 6 cases but 86% sounds cooler –eh?  It gets better.  Two quarters following a panic quarter – so 180 days after a panic quarter – the market has been up 100% of the time.  The average gain 180 days after the panic has been 15.3%. The average gain 4 quarters later has been 18.9%.  Remember, the average trailing 12 month gain for the S&P 500 since 1970 has been 8.0%.

 Consider for a moment the periods we are discussing here.  This analysis includes a 26% shellacking in Q3 1974 . . . back when Nixon resigned the Presidency and inflation was rising over 10% . . . the 23% crash in 1987 . . . the 1990 bear market decline, the 2001/2002 tech crash and of course, the panic of Q4 2008 – yikes! 

 So . . . except for a panic triggering event, 2011 has little in common with the prior periods of stock market panic – in all the prior episodes, the yield curve was flat or inverted, earnings were declining, etc.  Clearly we have some of the political theatre of the mid 70’s but today is tame in comparison – at least so far.  The bottom line:  sharp drops in the stock market are followed by above average gains.  Jeb Terry, Sr. Aug 20, 2011

 Aberdeen Investment Management – a guide service for micro-cap technology investment

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