17 years ago, when the 2008-09 Bear Market started, the days 21st January 2008 and the very next one 22nd January 2008, were forever etched in everyone’s (present then) memory. Nifty50 fell -8.70% and -5.94% on these two consecutive days. In fact, the intra-day low during both days was so bad that markets were down about -12.76% on 21-Jan and then again, down about -14.60% on 22-Jan during the day (lows)!
At the end of the day on 22-Jan-2008, Nifty50 was down -21.4% from the highs it made just a few days back! But these 2 weren’t the worst days of the bear market of 2008-09. That worst day was, in fact, 24-Oct-2008 when markets fell a whopping -12.20% in a single day! By the way, October 2008 was a scary month in itself. At one point, the index was down more than -35% during the month. And this was not from the start of the bear market but just in the month of October!
Have a look at the big fall days which I have highlighted in the table below. Five days of 5-6% fall and one day of 12-13% fall! October 2008 was not for the faint-hearted:
Those who have experienced a more recent (market) catastrophe of March 2020 would know how it feels. October 2008 had similar vibes! The one major difference was that October-2008 came after 6+ months of a bear market whereas March-2020 was just the start (and quick end) of it.
But moving on, and with the advantage of hindsight bias, now we know that the fall which began in January 2008, continued for several months with Nifty50 eventually reaching 2524 (on 27-Oct-2008), which was a fall of almost -60%. This continued till March 2009 and then the recovery began, as we all know now.
But if you go back to the table of October 2008, you will notice something else. There were quite a few big positive days as well. About 3 days delivered a positive return of +6-7%.
What this shows, and is often missed by many is that in markets, once a large move occurs in the markets, the probability of subsequent large moves increases dramatically near the days of such moves.
This is known as Clustering.
So the Big Falls or Rises in the market often happen close together. More often than not, the periods of high volatility when large price changes happen, don’t happen alone but generally come as part of a series of big moves spaced close together.
Let’s zoom out of October 2008 and see the full 2008-09 Bear market now. Between 1-Jan-2008 and 31-Mar-2009, there were about 304 trading days. Now I have ranked the Daily Returns for each day in reverse order. So the day with the worst return (which was 24-Oct-2008) as rank 1, followed by ranks 2 and 3 respectively for 21-Jan-2008 and 22-Jan-2008. The day with the best return is ranked last at 304.
Now I will show you how the clustering of big moves in the market happens. It may not happen all the time, but it does happen quite often, if you know how to look at the data.
This is the Clustering that happened in the last 2 weeks of January 2008
Big moves on both sides. Two days of big falls and two days of big up moves. So generally, big moves like these tend to cluster, with large swings triggering additional volatility in the coming days after such big moves. Here are other examples from 08-09: March 2008 again had its own share of small clusterings of big moves. Then after a few months, clustering showed up again in a big way in the months of June & July 2008
As mentioned earlier, Oct-Nov 2008 was super volatile in its own unique way (check the table I shared earlier to know why). Or here it is again:
But enough of these tables! Someone recently referred to me as Table-Investor instead of @StableInvestor (now I know why).
So what exactly am I trying to highlight here?
You have understood the clustering of big days does happen in times of heightened volatility (no, the last few years have not been volatile to be fair).
So if one thinks that they can perfectly time the markets by skipping the bad days, that’s easier said than done. Big positive days often come around big bad days only due to clustering. Not always but quite often. So it’s not easy to skip bad days and participate in only good ones by being quick on your feet!
Therefore for most investors looking to invest for their long-term goals, remaining invested (based on your asset allocation philosophy) is better than trying to perfectly time the markets by being 100% in or out of the markets.
Disclaimer – Investments in the securities market are subject to market risks. Read all the related documents carefully before investing. The index shown above is for illustration only. It is not a recommendation to buy/sell/hold. Please get in touch with your investment advisor to get customized investment advice based on your risk profile and unique requirements.