According to Efficient Markets approach, news and other publicly available information are incorporated into the price of a stock. One of the available news factors is a state of the stock market itself - bullish, bearish, or neutral. The state can be the same or it can evolve. A state change results the re-evaluation of price with a certain time delay. So any stock market movement causes a certain reaction of investors. If the market suddenly plunges, investors may start panicking, selling, and dragging the market even faster. If stock market prices are increasing without fluctuations for long, investors become confident to invest. As a result, if more money inflows, demand pushes prices up.
In the same way, one-day stock market performance can impact the emotions of investors. Therefore, it can be considered as a kind of indicator. The chart below shows how a big one-day positive performance can push the market up (callout 1..5):
The chart represents the curve of S&P-500 index values for period from October 2008 to April 2009 (blue line) and the curve of one-day performance (red line). The performance calculated using formula:
P1 = 100% * (C2 - C1) / C1
where C
2 - current day closing price, C
1 - previous day closing price.
© Alex Shmatov. Published with permission of the copyright owner. Further reproduction strictly prohibited without permission.
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