Short-term Risk Level:  2

Summary:  A few of our more sensitive indicators hit modest extremes on Wednesday.  After Thursday, there were more of them, and at more notable levels.

This afternoon we took a look at what happens after days like today, when we see a large gap down open (emotional selling), then lose even more ground during the day, trading at a six-month low.

The study is still mostly in effect.  Even though we didn't close more than 1% below the open, we still closed below it, and the historical precedents are mostly the same.  Short-term bounces (1-5 days maximum) are the norm.

During the day, our Cumulative TICK slipped below -8000 for only the fifth time in the past five years.  All of the others preceded short-term bounces (10/10/08, 11/12/08, 11/20/08 and 6/13/11).

The closing TICK figure from Bloomberg was -1086, meaning that greater than 1000 more stocks last traded on a downtick than an uptick at the closing bell.  That's a big scramble to reduce overnight exposure .

There have been 14 other days when the closing TICK was -1000 or worse.  10 of them saw the S&P rally the next day, averaging +1.0%.

Of the 4 that didn't rally, 3 rallied the day after that, averaging +4.7% (the one exception was 9/18/01 in the aftermath of the 9/11 tragedy).  So basically what we've seen is that when there was such a scramble to get out of stocks at the close, we either rallied the very next day, or the day after that.

This marked the Dow's worst 2-day drop since 2008.  Since 1900, there have been 35 times that index has seen a "worst 2-day drop in at least 2 years" while sinking to at least a 9-month low.  It just missed closing at a 9-month low on Thursday by a few points, but still...

Of those 35 times, the Dow rebounded the next day 25 times (a 71% winning percentage) with an average return of +0.8%.  Its winning percentage degrades quickly after that and within a week is back towards random.

Intermediate-term Risk Level:  5