Question 1: Does a rise in Nokia stock become more likely after a drop?
Case 1: Nokia stock drops by -5% or more in a week
Case 2: Nokia stock rises by 5% or more in a week
Is the chance of say a 5% rise in Nokia stock over the subsequent month after Case1 or Case 2 occurs much higher for one versus the other?
For Nokia, the answer is not really. The chances of a 5% rise over the next month (21 trading days) is about 36% for Case 1, where the S&P has just suffered a
big loss, versus, about 37% for Case 2. Try the Trefis machine learning engine to test for yourself what you see for Nokia stock.
Question 2: What about the other way around, does a drop in Nokia stock become more likely after a rise?
Consider, once again, two cases
Case 1: Nokia stock drops by 5% in a week
Case 2: Nokia stock rises by 5% in a week
The chance of a -5% drop after Case 1 is about 36%, versus about 31% for Case 2. For comparison, for the S&P 500, and for many other stocks, turns out the chances of a 5% drop after Case 1 or Case 2 has occurred, are actually quite similar.
Question 3: Does patience pay?
If you buy and hold Nokia stock, expectation is over time the near term fluctuations will cancel out, and the long-term positive trend will favor you -
at least, if the company is otherwise strong.
Overall, according to data and Trefis machine learning engine's calculations, patience absolutely pays for most stocks!
As a comparison, for after a drop of 5% in S&P 500 over a week (5 trading days),while there is only about 18% chance the S&P 500 will gain 5% over the
subsequent week, there is more than 50% chance this will happen in 6 months, and 74% chance it’ll gain 5% over a year (about 250 trading days).
The table below shows the trend for S&P 500:
Given a change of Then chances S&P 500 will change Likelihood
-5% over 5 days +5%over 1 day 5%
-5% over 5 days +5% over 5 days 18%
-5% over 5 days +5% over 10 days 30%
-5% over 5 days +5% over 20 days 34%
-5% over 5 days +5% over 60 days 52%
-5% over 5 days +5% over 250 days 74%
Worthy to note row 1 in the table above. You can try the engine to see what does that table look like for Nokia.
Question 4: What about the possibility of a drop after a rise if you wait for a while?
There are two opposing forces at work on Nokia stock here. First, is the general positive bias for Nokia stock, and for most other stocks - that pulls the stock upwards with time. Second, the basic chance of a drop, as a chance of any event happening, should simply increase with passage of time.
As a comparison, we indeed see these two interesting things for S&P 500. First, after seeing a rise of 5% over 5 days, the chances of a 5% drop in S&P 500
are about 15% over the subsequent month of waiting (21 trading days). However, this chance drops slightly to about 13% when the waiting period is a quarter
(63 trading days).
This increase in basic chance of an event happening is evident when you compare the
first two rows of the table below.
Given a change of Then Chances S&P 500 will change Likelihood =
+5% over 5 days -5% over 1 day 1%
+5%over 5 days -5% over 5 days 6%
+5% over 5 days -5% over 10 days 8%
+5% over 5 days -5% over 20 days 15%
+5% over 5 days -5% over 60 days 13%
+5% over 5 days -5% over 250 days 14%
It’s pretty powerful to test the trend for yourself for Nokia stock. Would be great
to hear how the results compare versus your own intuition