“I tend to stay with the panic. I embrace the panic.” – Larry David

The stock market was down today. That fact alone is not at all unusual (47% of all days are negative historically). What was somewhat unusual is the aggressiveness of the selling in today’s session, what some would refer to as “panic selling.”

Panic selling is a subjective term but there are various metrics one can use to help identify it in an objective fashion. One of those metrics is measuring the declining volume in the NYSE over the total volume. When it exceeds 90% (a “90% downside day”), you have panic selling in my view. We have data on this going back to 1970 and such days occur less than 1.5% of the time (3-4 times/year on average).

Yes, there are varying degrees of panic. On October 19, 1987, the S&P 500 declined over 20%, its worst single-day decline in history. On Black Monday, downside volume was 99.7% of total volume, the highest in history. Today the ratio came in at 96.8% which is quite high (25th highest since 1970 out of 11,775 trading days) but with the S&P 500 down only 2.4%, it was far from a 1987-style crash.

The temptation for traders/investors after such a day is obvious: sell. The headlines are negative, sentiment is pessimistic, and we are wired to assume that only more bad news/returns will come (recency bias).

And has that assumption been correct historically?

On average, no. In fact, just the opposite is true. Since 1970, the average returns following 90%+ downside days are not only positive but higher than your typical day. It is higher not only the following day but also the following month and year. And as the second table below illustrates, it is more likely to be positive as well.

Now, to be sure, there were many instances where panic selling was followed by more selling. Maybe that will happen this time around as well. I don’t know. All I know is that the evidence suggests the odds of that happening are lower following days of panic selling than other days. So you should have been more afraid of selling yesterday, before the panic selling, then today, after it has already occurred.

Which is a roundabout way of saying that instead of fearing panic, perhaps more rational response as investors would be to embrace it. For it is panic that creates opportunity in markets.