Question 1: Does a rise in Apple stock become more likely after a drop?
Answer: Consider two situations,
Case 1: Apple stock drops by -5% or more in a week
Case 2: Apple stock rises by 5% or more in a week
Is the chance of say a 5% rise in Apple stock over the subsequent month after Case1 or Case 2 occurs much higher for one versus the other?
Interestingly, for Apple, the answer is not really. The chances of a 5% rise over the next month (21 trading days) is about 40% for Case 1, where the Apple has just
suffered a big loss, versus, about 41% for Case 2.
Question 2: What about the other way around, does a drop in Apple stock become more likely after a rise?
Consider, once again, two cases
Case 1: Apple stock drops by 5% in a week
Case 2: Apple stock rises by 5% in a week
The chance of a -5% drop after Case 1 is about 29%, versus about 26% 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 also quite similar.
Question 3: Does patience pay?
If you buy and hold Apple 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!
For after a drop of 5% in Apple stock over a week (5 trading days),while there is only about 21% chance the stock will gain 5% over the subsequent week, there
is more than 58% chance this will happen in 6 months, and 60% chance it’ll gain 5% over a year (about 252 trading days).
The table below shows the trend for Apple stock
Given a change of Then chances Apple stock will change Likelihood
-5% over 5 days +5%over 1 day 6%
-5% over 5 days +5% over 5 days 21%
-5% over 5 days +5% over 10 days 33%
-5% over 5 days +5% over 20 days 40%
-5% over 5 days +5% over 60 days 49%
-5% over 5 days +5% over 250 days 60%
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 Apple stock here. First, is the general positive bias for Apple 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.
After seeing a rise of 5% over 5 days, the chances of a 5% drop in Apple stock are about 25% over the subsequent month of waiting (21 trading days). However, this
chance drops slightly to about 23% when the waiting period is a quarter (63 trading days).
Given a change of Then Chances Apple Stock will change Likelihood
+5% over 5 days -5% over 1 day 3%
+5% over 5 days -5% over 5 days 14%
+5% over 5 days -5% over 10 days 20%
+5% over 5 days -5% over 20 days 25%
+5% over 5 days -5% over 60 days 23%
+5% over 5 days -5% over 250 days 28%