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How to trade the mysterious Rule 48

The New York Stock Exchange had investors scratching their heads this week with the invocation of the little-known Rule 48.

The regulation was approved by the Securities and Exchange Commission in 2007 and is meant to calm a market opening in times of volatility. Though the exchange has lost more than 60 percent of its share of trading in the past 10 years, the NYSE still plays a role for investors and the financial media alike. So the sounding of an emergency bell before the Big Board lights up often presages a rough trading day.

Indeed, the S&P 500 has a median return of negative 1.2 percent on days that Rule 48 has been invoked, according to data from market research firm Kensho. Still, there are ways you can keep your head above water when the Rule 48 bell rings.

With the addition of calls this week on Monday, Tuesday and Wednesday, Rule 48 has been invoked 76 times since its creation, according to the NYSE's website. Most of the times were in the first years it was available, during the shaky days of the financial crisis. That includes 35 times in 2008, nearly half of the total number of uses. There's just a handful of times it's been called three times in a row, though the record is five consecutive trading days in October 2008.

It also tends to be invoked during the late-year slump—36 percent of calls were in September and October.

Overall, stocks in the energy and basic industries sectors saw the worst performance, according to data from Kensho.

The study from Kensho looked at how stocks in the S&P 500 performed if they were bought the day before Rule 48 was called, and sold the day after. Aes, for example, traded positive less than half the time and had a median return of negative 2.7 percent. Murphy Oil, Halliburton and Chesapeake Energy were among those that had median returns below negative 2 percent.

Often in times of volatility, the outperformers are basics that consumers need. Investors flock to consumer staples, utilities and real estate in particular, and a Rule 48 day is no different. The top performers were Netflix, Green Mountain Coffee Roasters and HCP, a health-care real estate company.

Looking at these returns a little more rigorously, only two pass a significance test compared to normal trading days for each index. The -0.8 percent return of consumer staples—better than the S&P 500—had a p value of .004, which is well below the customary cutoff of .05, or a 5 percent chance of that pattern arising by chance from the data. Utilities and health care also had low p values.