# Machine Learning Answers: If Ericsson Stock Drops 5% One week, What Are The Chances It’ll Rebound? – Forbes

GOTHENBURG, SWEDEN – 2019/10/07: Swedish multinational networking and telecommunications company … [+]

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We started with a simple question that investors could be asking about the Ericsson stock: given a certain drop or rise, say a 5% drop in a week, what should we expect for the next week? Is it very likely that Ericsson will recover the next week? What about the next month or a quarter?

In fact, we found that if the Ericsson drops 5% in a week (5 trading days), there is a ~21% chance that it will rise by 10% over the subsequent month (21 trading days). Want to try other combinations? You can test a variety of scenarios on the **Trefis Machine Learning Engine to calculate if Ericsson stock dropped, what’s the chance it’ll rise**.

For example, after a 5% drop over a week (5 trading days), the Trefis machine learning engine says chances of an additional 5% drop over say the next month, are about 21%. Quite significant, and helpful to know for someone trying to recover from a loss.

Knowing what to expect for almost any scenario is powerful. It can help you avoid rash moves. Given the recent volatility in the market, the mix of macroeconomic events, including the trade war with China, and the US Federal Reserve’s moves, we think investors can prepare better.

**Question 1: Does a rise in Ericsson stock become more likely after a drop?**

**Answer:**

Consider two situations,

*Case 1:* Ericsson stock drops by -5% or more in a week

*Case 2:* Ericsson stock rises by 5% or more in a week

Is the chance of say a 5% rise in Ericsson stock over the subsequent month after Case 1 or Case 2 occurs much higher for one versus the other?

The answer is yes. The chances of a 5% rise over the next month (21 trading days) is about 36% for Case 1, where the stock has just suffered a big loss, versus, about 26% for Case 2. The situation is about the same for the S&P as well, with a probability of a rise after a drop being more likely.

**Question 2: What about the other way around, does a drop in Ericsson stock become more likely after a rise?**

**Answer:**

Consider, once again, two cases

*Case 1:* Ericsson stock drops by 5% in a week

*Case 2:* Ericsson stock rises by 5% in a week

The chance of a -5% drop after Case 1 is about 21%, versus about 27% 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?**

**Answer:**

If you buy and hold Ericsson 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!

The table below shows the trend for Ericsson:

Trefis

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).

**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 Ericsson stock here. First, is the general positive bias for Ericsson 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.

In comparison, for the S&P 500, 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).

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