In the past two days, global stocks significantly gained and it was mainly brought on by the biggest one-day gain in seven years posted by Japan. Dominant indices in the weakening Chinese economy like the Shanghai Composite also rallied sharply. Some major currencies in the Asian region were also strengthened. However, as much as these market surges ease our worries, we cannot boost our confidence right away. The current trend is inconsistent and we are not spared from the volatile nature of the market. Actually, the biggest concern we have here is not whether when the stock market will go up or down, but when and how will we sustain and achieve long-term stability given the fickle and tremendous trend of upswings and downturns. The damages are not serious — at least for now — but we need a serious overhaul.
This is the problem with huge, impressive one-day gains: it easily turns us from worried investors to complacent players of the market. On that note, I may have to remind you that we should not be fancied by sudden upturns. It shifts our focus to trusting that the market will continuously go up.
Technically speaking, big upsurges only happen when the market is already on the brink. Michael Batnick showed that 88 percent of the outstanding days in nearly 45 years occurred under the 200-day moving average. Others may favor this kind of trend, but experienced and knowledgeable traders would prefer three 100-point days than one 300-point day. Gradual upswings are more sustainable and healthier than big, easy gains
According to research done by Salil Mehta at Statistical Ideas, 10 percent of nine-year trading days show an outsize move up or down, 100 of which were up and 129 were down. Shortly speaking, only four percent were positive and the rest 6 percent were negative.
What can we make of these data? In a trend of sudden upsurge after almost hitting rock bottom, the gains are barely enough to make up and completely lift the market. The thing is, that anything can happen from time to time and investors have to prepare themselves in going along with the changes. Traders and analysts alike need to develop flexibility and deep understanding of the trends, theories and changes that respond well to the many possible phenomena.