collapsed nearly 89 percent. During that period, there were 37
episodes when the Dow changed by 5 percent or more. Surprisingly,
21 of those episodes were increases! Many of these sharp rallies were
the result of short-covering, which occurred as speculators who
thought the market was on a one-way street rushed to sell stock they
did not own and were then forced to buy it back, or cover their posi-
tions, once the market rallied.
It is not uncommon for markets that appear to be trending in one
direction to experience occasional sharp moves in the other direction. In
a bull market, the expression “up the staircase, down the elevator” is an
apt description of market behavior. Ordinary investors must beware: it
is not as easy to make money in trending markets as it looks, and in-
vestors who try to play these markets must be ready to bail out quickly
when they see the market change direction.
284 PART 4 Stock Fluctuations in the Short Run
FIGURE 16–5
Distribution of Dow Jones Industrial Average Changes over 5 Percent, 1885 through December 2006