Question 1: Does a rise in Amazon stock become more likely after a drop?
Answer:
Consider two situations,
Case 1: Amazon stock drops by 5% or more in a week
Case 2: Amazon stock rises by 5% or more in a week
Is the chance of say a 5% rise in Amazon stock over the subsequent month after Case 1 or Case 2 occurs much higher for one versus the other? Yes. The chances of a 5% rise over the next month (21 trading days) is about 43% for Case 1, i.e. when Amazon’s stock has just suffered a loss, versus about 37% for Case 2.
Question 2: What about the other way around, does a drop in Amazon stock become more likely after a rise?
Answer:
Consider, once again, two cases
Case 1: Amazon stock drops by 5% in a week
Case 2: Amazon stock rises by 5% in a week
The chance of a 5% drop after Case 1 is about 32%, versus about 30% for Case 2. For comparison, for the S&P 500 and for many other stocks, it turns out the chances of a 5% drop after Case 1 or Case 2 has occurred are also quite similar.
Question 3: Does patience pay?
Answer:
If you buy and hold Amazon stock, the 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!
For after a drop of 5% in Amazon stock over a week (5 trading days), while there is only about 43% chance the stock will gain 5% over the subsequent week, there is more than 46% chance this will happen in 3 months, and 62% chance it’ll gain 5% over a year (about 250 trading days).
The table below shows the trend for Amazon stock:
Given a change of Then chances Amazon Stock will change Likelihood =
-5% over 5 days +5% over 1 day 10%
-5% over 5 days +5% over 5 days 27%
-5% over 5 days +5% over 10 days 35%
-5% over 5 days +5% over 21 days 44%
-5% over 5 days +5% over 63 days 46%
-5% over 5 days +5% over 252 days 62%
Question 4: What about the possibility of a drop after a rise if you wait for a while?
Answer:
There are two opposing forces at work on Amazon stock here. First, is the general positive bias for Amazon 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 the passage of time.
After seeing a rise of 5% over 5 days, the chances of a 5% drop in Amazon stock are about 30% over the subsequent month of waiting (21 trading days) and this increases to 34% when the waiting period is a quarter (63 trading days).
Given a change of Then chances Amazon Stock will change Likelihood =
+5% over 5 days -5% over 1 day 6%
+5% over 5 days -5% over 5 days 16%
+5% over 5 days -5% over 10 days 24%
+5% over 5 days -5% over 21 days 30%
+5% over 5 days -5% over 63 days 34%
+5% over 5 days -5% over 252 days 26%