Last week was rather rough for the stock markets all over the world. In the first four days S&P 500 lost more than 4%. Media is of course full of negative and scary articles and it’s easy to lose the big picture. But according to my calculations a weekly fall (from Friday to Friday on the close) of more than 4% has happened 53 times since 1993. That is 4% of the sample, so it happens quite often (in my opinion).
Here is the weekly distribution in percent (for example 547 observations/weeks where S&P rose more than zero but less than 2%):
The table below shows the return the following week after weeks with negative returns (if S&P 500 for example this week fell more than 5% then average return next week is 1.53%):
For comparison the average weekly return over the whole period is 0.2%. In other words, any negative week shows much better performance the next week than any random week.
The table below shows the return the following week after weeks with positive returns:
If this week was positive, we can expect negative return next week.
We can conclude S&P 500 has over the period shown strong mean reversion.