- USA TRADERS THREAD -

ANNANDALE, Va. (MarketWatch) -- There's no doubt that Tuesday was an ugly day for the stock market.

fell by 105.50 points, or 0.97%, despite this week having one of the most positive seasonal biases of the entire calendar.

In fact, according to Steve Todd of the Todd Market Forecast, Tuesday's decline was "the worst day after Christmas for the stock market ever."

Oh, yeah? Was Tuesday's decline really that bad?

Data junkies like me consider any claim that something has never happened before to be the functional equivalent of throwing down the gauntlet.

So I scurried off to my databases to see what I could find.

I found that when declines are measured in terms of DJIA points, Todd is right. Tuesday's decline was indeed the worst, at least since 1896 when this market average was created. Prior to Tuesday, the next biggest point drop came in 1987, when the DJIA dropped by 56.70 points on the first trading day after Christmas.

But when measured in percentage terms, Tuesday's decline was not the worst. Indeed, since 1896, there have been nine years in which the DJIA declined by more on the day after Christmas than it did this year.

In fact, the biggest percentage decline for the DJIA on the first trading after Christmas came in 1937, when the market dropped by more than 3%, or nearly three times more than the market dropped on Tuesday of this week.

And since it is in percentage terms that proper historical comparisons are made, it is an exaggeration to say that Tuesday's decline was the worst ever.

The more important question, though, is whether a big down day after Christmas tells us anything about how the market is likely to behave in coming weeks.

The answer is no.

Just consider 1937, the year of the biggest percentage decline on the day after Christmas. The DJIA rose by more than 28% during 1938, nearly triple the market's long-term historical average.

To be sure, one shouldn't base any analysis on just one year's experience. But I reached broadly similar conclusions when I subjected the DJIA's 109-year history to more sophisticated econometric tests. While the correlation between the DJIA's performance on the day after Christmas and its return over the subsequent year is exceedingly weak, there is at least some evidence that the relationship between the two is inverse, meaning that weakness on the day after Christmas is more likely to be followed by strength over the following year than it is to be followed by more weakness.

At a minimum, that suggests there is no basis in Tuesday's decline to become any more discouraged about 2006's prospects than you were before.