Monday, May 30, 2011

Random Thoughts on a 25% Weekly Drop from a Multi Year High



Much has been publicized about the dramatic fall in Silver the last few weeks.  It made a multi-year high of $49.82 the week of April 29, 2011, then proceeded to drop about 28% on massive volume the week of May  6, 2011 to around $35.  Out in the internet space, some people have been calling for a continued decline into the teens, while others are predicting a rise above $50/oz before year end.  
I wanted to examine this '25% weekly drop from a multi-year high' a little further.  Rather than just looking at the 1980 top in Silver, I needed to broaden this out to stocks in order to get some perspective from a larger sample size.  I don't believe it's ever good when your stock makes such a huge drop from a multi-year high.  But how bad is it really?  Do stocks normally recover from these swift drops?  If they do, how long does it usually take until they surpass their old high?  What might I be able to expect?

I ran the following test in an attempt to mirror what happened to Silver.  The test was this: 1) 20% run up over the previous 3 weeks, 2) Reached 10 year high within the last 3 weeks, 3) Down at least 25% on the week

I ran the test on all stocks (including de-listed) from 1995 to the present.  I am trying to get a general idea regarding the price activity after the event. 
Will my stock ever surpass that previous high? The test yielded a 442 sample size, and 185 times (42%) the stock surpassed its previous high. So, yes it can happen.

How long did it take? Anywhere from 2 days to 2022 days.  The average was 305 days.  The median was 104 trading days.  Regarding the median: half of the 185 stocks that reached a new high did it within 5 months after the big drop.  So if the stock doesn't retake the high in the first 5 months, it could drag out for years.
What happened to the stocks that never regained their previous multi-year high? 257 stocks (58%) have not reached that previous high and 145 of them became de-listed. So roughly one-third of the sample didn't reach a new high and received the ultimate death knell, delisting.  That leaves 112 active stocks still trying to make a new high.  Most of them have been trying for years and are still 50 - 60% off the highs.
Keep in mind. Half the sample was generated  in 1999 and 2000.  This was a time of a highly volatile, uptrending market.  Dropping 25% in one week then rising 40% the next was much more common than today.  

Final Thoughts. It certainly is possible for a stock to reach a new high after 25% weekly decline from a previous high.  If it doesn't happen within 5 to 6 months, there is a good chance it will languish for years or de-list.  

That is all I have right now.

3 comments:

Venkat said...

Thanks for that interesting piece of research.

Anonymous said...

Silver is not a stock; it is a commodity. It is highly unlikely that the value of silver will decline to zero but, it is likely that there will be an event or a series of events that will drive the price of silver above its recent high.

Chris said...

Clearly stocks are not commodities. Silver will not go to zero, but it's plunge just got me thinking about those kind of drops in general. The easiest thing would be for me to say: "Silver crashed from multi-year highs in 1980. It hasn't recovered. It will do the same again today." I had to apply the test to stocks to get some sample. I was thinking that the general laws of supply and demand would be applicable, whether stock or commodity.

It's "likely" that some event will drive Silver past it's recent highs? The people who said that in 1980 are still waiting for their event.

Silver has languished below it's high for 31 years. Many stocks behaved that same way. I would consider a 25% weekly drop from multi-year highs a warning regarding the health of your asset.

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