Missing Out On The Biggest Up Days in the Market

Investing Strategies Technical Trader's Sanctuary
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I always hear this trope and it annoys me. And I heard it from a financial advisor yesterday. I am skeptical and cynical by nature and I never really believed it, and when I contemplated it in more depth, I really did not believe it, but I could be wrong.

I decided to do some actual research and found a 2019 Motley Fool article

What Happens When You Miss the Best Days in the Stock Market? | The Motley Fool

It cites a coupe studies. JP Morgan…

J.P. Morgan Asset Management’s 2019 Retirement Guide shows the impact that pulling out of the market has on a portfolio. Looking back over the 20-year period from Jan. 1, 1999, to Dec. 31, 2018, if you missed the top 10 best days in the stock market, your overall return was cut in half. That’s a significant difference for only 10 days over two decades!

So, they are really saying, if you took all your money out for ONLY those 10 days, your returns would be 50% lower. Not only is that absurd, I guaranty that no human had all their money on for only those 10 days.

Putnum:

Putnam Investments found similar results by studying the data from 2003 to 2018. If you were fully invested in the S&P 500, your annualized total return was 7.7% during that time. But if you missed the 10 best days in the market, it dropped to a paltry 2.65%.

Same thing, they are tacitly saying “If you ONLY missed the best days, your return would be much worse”. Which is to say, you are riding the market down day after day, and then you happen to bail for the one big bear market bounce, then you get back in the next day and continue to ride the market down. Absurd.

Here is the Nasdaq chart from the end of 2022, during the big decline from the Fed raising interest rates. All those (6) days marked with the red line were up 3% or more from the previous close. The last one to the right was 4.4%. No one can show from the chart that if I missed any or all of those days that I would have been worse off, the market made new lows after all of them. In fact, if I got 100% out of the market when it went below the 200dma, then I would have saved a lot of money and would have started compounding from a higher base when I started getting back in on an IBD follow through day.

I bet this chart is representative of most of the “biggest moves” research that was done.

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I have also heard that most (or at least 50%) of the biggest up days are in the midst of a big down trend, just like the one the other day. Naz was up 12%, but at one point was down 6% today, giving back half. We are not out of the woods either, I bet we set a low below the low of that day, which makes that price increase null and void.

Someone with data might do a study about how many of the 10 biggest days were undercut within a month.

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Justin Nielsen ripped off a list of the largest single day increases this morning, seemed like most were 1990 to date. I will go back and try to write down some of those dates. Regardless, his point was not that they were undercut but that were not typically not the single start to direct uptrends. They essentially all has subsequent pullbacks and negative days. Much like today. While special days in terms of volume and change, they didn’t mean that much as individual days to total change in reality. I’ll go back to the recordings and try to get the dates.

The other thing I always think about when arguing with my brother (who uses a financial advisor) is to remember the math involved. If you loose 20%, the remaining monies you have has to make 25% gain to get back to square. For example, if you have $100 dollars and drop value to $80 dollars, those $80 dollars have to make the same $20 dollars to recover, but that’s $20/$80 or 25% gain. If you loose 25%, that $75 needs to gain 33% to be even, etc. Not to mention I sleep better than he does at night during these times.

Lakedog

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This is data listed on Wikipedia, which I have not specifically confirmed, but a quick look supports it’s accuracy. These are the top close to close percentage gains in S&P 500 as well as NASDAQ. Note, S&P goes back to the 1930’s crash and that actually dominates. The second SPX list excludes those 1930’s dates. As you note, the record days aggregate in down markets.

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Three bear market periods stand out for having the largest day gains close to close. The Global Financial Crisis (2008-2009) for both indexes, the Dotcom Bubble Crisis (2000-2002) mainly NASDAQ and Covid Com (2020) mainly impacting the SPX. Technically, the Dotcom bubble never regained it’s highs before plunging into the Global Financial Crisis, so most technicians call it one Bear Market, the “Lost Decade.”

Looking at these major record gain days in the NASDAQ in a couple of market bears, starting with 2007-2009 mortgage crisis that carries two of the largest gains (including the 1st and 2nd largest SPX gains according to Wikipedia). Those dates 10-13-2008 and 10-28-2008 are number 3 and 5 for NASDAQ.

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The obvious finding is the large red candles that immediately follow the major gains or abbreviated rallies with significant declines undercutting the entire gain. So in regards to not making near as much holding through the bottom; well, you miss a lot of the huge losses also. I’m curious how the calculations are truly made to say you lose huge gains, other than to simply remove those profits. I’ll have to add it to my to-do spreadsheet/python list to run a more detailed check. Probably not until the rains return heavily next fall.

As a sidenote, I haven’t gone through candle by candle, but using TOS Market School charting, there were seven (7) rally days since the market dropped over 20% from October 2007. Six of them failed for long term recovery, mainly by rally low undercuts (one I haven’t confirmed specifically). That bears repeating, SIX rally attempts failed longer term. The successful one on March 10, 2009 had a follow-through day on day 5 and never looked back. Both were strong Belt-hold or true Marubozu candles. The price action is very interesting in that it visually tightened up in volatility and around the 21 sma going into the successful rally day. It would be interesting to take a look at that with actual ATRs but that’s beyond my free time. The Dotcom leg of the Lost Decade also had some record gain-days in the NASDAQ, not surprisingly. Most also followed by significant decline day(s) or limited short rallies. I’ll spare you the graphs as it takes a couple to cover that.

However, the Covid Flash Bear is interesting. The SPX was more dramatic than the NASDAQ. Again, given the general market target for the crash. It had two record gain days, the first being immediately followed by a record gap down day. However, the second was the one instance I found that you would have lost some advantage. It was the one and only Rally Day for this crash and proved very successful. Note the strong candles on the rally as well as the volatility contraction, especially the tightening around the 21 and then 50 sma’s. That is one solid reason to watch the VIX as it reflects volatility on a daily calculation while ATR is an averaged value. Another study to be done………..

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I can’t mathematically support your claim just with graphs, but looking back at other previous bear episodes, the “picture” in my opinion fully supports your position. Not surprised as bear action induces and supports volatility which is reflected in price action as movement extremes.

As a side note, I tried to look up your referenced Putman article but couldn’t get past the negative reports on Putnam such as this one:

As they always say, consider your source.

Lakedog

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Hi @PuddinHead42 & @Lakedog

I always shudder when I see someone spouting-off about missing the “Big 10” or whatever. It is utterly preposterous!

Selling out, letting the market climb for a day, then buy back in on the third day? Silly beyond belief.

For a similar thread I posted the 10 Best and Worst sorted together:

10/19/1987 -20.47% Black Monday
10/26/1987 -8.28% Black Monday 2.0
10/27/1997 -6.87% Asian Financial Crisis
09/29/2008 -8.79% Global Financial Crisis
10/09/2008 -7.62% Global Financial Crisis
10/13/2008 11.60% Global Financial Crisis
10/15/2008 -9.03% Global Financial Crisis
10/28/2008 10.80% Global Financial Crisis
11/13/2008 6.90% Global Financial Crisis
11/21/2008 6.30% Global Financial Crisis
11/24/2008 6.50% Global Financial Crisis
12/01/2008 -8.93% Global Financial Crisis
03/10/2009 6.40% Global Financial Crisis
03/23/2009 7.10% Global Financial Crisis
— — —
03/09/2020 -7.60% COVID-19
03/12/2020 -9.51% COVID-19
03/13/2020 9.30% COVID-19
03/16/2020 -11.98% COVID-19
03/24/2020 9.40% COVID-19
04/06/2020 7.00% COVID-19

There still is a lot of vacuum between a lot of the dates but the Covid-19 shows fairly true. Missing the 3/13 gain might not have been so bad if you missed the day before or a few days after …

People say it “shows the importance of staying invested.”

I say it is just dis-jointed, vacuum-packed baloney!

Does that help you?

Gene
All holdings and some statistics on my Fool profile page
Profile - gdett2 - Motley Fool Community (Click Expand)

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Excellent work. Also, IBD was listening to us and they posted this table on the Friday video. (They also reviewed some of them, so worth watching)

The interesting and obvious fact is that almost every single one was undercut in a fairly quick number of days.

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R.I.P. bogus “study” by stupid brokerage houses! Clearly they did not do their homework, they probably just took the %gains and did really bad math with how it “might” have lowered the overall returns.

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I keep coming back to look at this table. I’m intrigued by their listing the ATR. I was truly struck by the graphs with the tightening up of price action as they started to reverse. I wonder if using a much shorter interval like 3, 5 or 8 ATR might not give more of an immediate hint that the tide is turning. Or daily VIX or VIX delta. Clearly need to build a spreadsheet to explore.

Was this Fridays SMT? I can’t keep track of the content they put out and obviously don’t have access to a lot of it. Had to be Justin Nielsen, he’s the Excel master.

Thanks for sharing.

Lakedog

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Yes, this was Friday’s SMT, almost always with Webby and has public access. Webby used to do a similar version for Swing Trader every Tuesday, but now only does it the second Tuesday of the month. Also public access.

https://www.investors.com/ibd-videos

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I asked my financial guy to run this “study” with down days, here is the chart and what he said..

Here’s what I was able to come up with. This assumes a perfect hit rate for each of the periods mentioned which I think that we can both agree is not improbable but impossible. For example, the 10 worst days, you sold at 3:59 pm the afternoon before the following day which is included in the 10 worst days. So you captured that final up return, missed the big down day and then reinvested to capture any returns moving forward from there.

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You get much better returns by missing the bad days than by not missing the good days.

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