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There’s an adage that sticks in my head, but it’s hard to pin down. The saying is some variation of “stocks take the stairs to the roof and the elevator to the basement.” The implication is that stocks tend to grind higher when they rally but fall quickly when sentiment turns. Most market adages are rooted in fact, but when we thought about the market’s recent moves, we decided to question this one.
The basic premise does seem to have some resonance. We all can think of long periods when stocks rallied, often with low volatility and bear markets when stocks dropped sharply. Of course, the latter periods are relatively few and far between, especially during the past fifteen years or so (with the exception, of course, of early 2020). But I’ve found myself writing more frequently about sharp rallies, often fueled by short-term options traders. So, I decided to compile some evidence.
I checked the frequencies of one-day S&P 500 (SPX) moves of greater than 1%, 2% and 3% since 2010. Over that period, there appears to be some truth to the adage, though it seems to have become less accurate in recent years.
SPX 1-Day Moves in Various Timespans
Source: Interactive Brokers
We know that markets have gone up substantially over the past few years, so it should not be a surprise that we have seen more up days than down days over most of the past 15 years. We also see that the percentages of 1% moves, either up or down, have generally matched those of the overall level of up and down days. This is true over the whole period and the 4 ½ years since the post-Covid market recovery began in earnest.
But there are indeed some differences. For most of the longer periods, we saw that 2% and 3% moves were more likely to be to the downside. That fits with the adage. But that seems to have changed in recent years.
- During 2022, which was the most recent bear market, we saw a greater likelihood for +1% and 2% moves to be upward than we saw for up days overall. That speaks to the increased volatility that occurs during down markets, along with the propensity of bear market rallies to show outsized gains. That said, the 3% moves were definitely to the downside.
- And since 2023, when so-called 0DTE options took root among traders, things seem to have changed somewhat. 1% up days were more likely than up days overall, there was an even split between infrequent 2% moves, and no moves of more than 3%.
It is tough to draw conclusions from a relatively short timeframe – even if it has over 500 readings – but it is entirely possible that this is reflective of the potent combination of positive momentum, FOMO, and the ability to monetize them using short-dated options. Modest rallies can more easily become big rallies, and the deeply ingrained “buy the dip” mentality has allowed us to avoid relatively major drops in the past two years.
We can’t prove that the adage is passe, but it may have much less value in the current market environment.