What Happens After a Big Drop on a Friday?

After a 3.6% drop on Friday, the S&P 500 dropped another 1.8% yesterday, for the worst two-day decline since late August 2015. Here is where things get interesting: the CBOE Volatility Index (VIX) surprisingly dropped 7%. Remember, the VIX tends to trade inversely with the S&P 500—especially when the S&P 500 drops significantly—as the need to hedge portfolios increases, and thus, the VIX usually gains. Yesterday, that didn’t happen.

Why is that? One answer is, there was so much worry and fear on Friday (and over the weekend) of an upcoming Brexit-related drop on Monday, that a nearly 2% drop in equities actually calmed some fears. Looking back in history, the last time the VIX dropped 7% and the S&P 500 lost as much as it did yesterday was in early August 1990, when Iraq invaded Kuwait. Be aware that a month later the S&P 500 was down 4.3% and lower by 6% three months later.

Turning back to Friday’s activity, we noted over the weekend on Twitter that Monday tends to see a big decline after a 3% drop occurs on a Friday. That recent trend continued once again with yesterday being down another 1.8%. We decided to take a closer look at how the entire following week performs after a 3% drop on a Friday. As you can see here, going back to 2000, Tuesday tends to see the largest bounce back, while Friday is also strong. The good news is—the full week is actually higher on average after the usual big dip on Monday.

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IMPORTANT DISCLOSURES
Past performance is no guarantee of future results. All indexes are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment.

The economic forecasts set forth in the presentation may not develop as predicted.

The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual security.

Stock investing involves risk including loss of principal.

The S&P 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

The VIX is a measure of the volatility implied in the prices of options contracts for the S&P 500. It is a market-based estimate of future volatility. When sentiment reaches one extreme or the other, the market typically reverses course. While this is not necessarily predictive it does measure the current degree of fear present in the stock market.

This research material has been prepared by LPL Financial LLC.

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