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How Would You React To A 2,000 Point Dow Jones Drop?

Friday, March 17, 2017

Sheila Jamison and Rich Jamison

A pullback of 2,000-3,000 points in the Dow Jones Industrial Average is not out of the realm of possibility. Got your attention, didn’t it?

The real question is how significant would that be. Of course, that is up to each of us as we all react differently on the emotional level. Statistically speaking, it’s a different story.

Corrections – pullbacks of 10% - are ‘normal’ parts of the stock market. In fact, over the last 30 years, the market had declined an average of 14.3% from their high points to their low points on an intra-year basis.

The DJIA reached 21,115 on March 1 this year. A 10% pullback would be 2,111 points. If we hit the 30-year average, that would be 3,019 points. Moral: When the base numbers get that big, the percentages also increase in absolute size.

The other side of that same coin is that a pullback of 1,500 points in the DJIA wouldn’t even count as a correction in technical evaluation of the market.

Past results cannot guarantee future events … but it’s still comforting to know how things played out in the past. It may help understand how the law of large numbers comes into play also, magnifying the absolute values of point moves. Imagine the reaction to the DJIA dropping 2,000 points 20 years ago when it was at 7,000!

Give us a call or send an email if you’d like to talk about where your ‘significance’ level lives.

Reference
Trader Talk. Bob Pisani. CNBC. March 15, 2017