It certainly has been a hyperactive market, almost impossible to second guess. Here's a measure of that activity that I like to look at. The green triangles represent days on which the Dow moved higher by at least 1.5% after falling that amount or more the day before. The red triangles represent the opposite.
I use this to counter the 'Buy and Hold' crowd when they try to make me buy and hold a mutual fund. They like to say that if you miss the 10 biggest winning days of the year you will make nothing so you better stay in the market. What they don't tell you is how often these one-day reversals occur, and there are even more one-week reversals.
However, if you think these 10 years have been the worst ever, take a look at the next chart showing the four years of the depression.
This pretty much says it all:
http://www.zerohedge.com/news/art-cashin-talks-market-dramamine
Here is how trader, Gary Kaltbaum described the market recently.
Crash into early August, then hit a low where market rallied up 10% in six days.
We then dropped about 7% in 3 days.
We then rallied up about 9% in 7 days.
And then in 2 days we dropped about 8%.
In 2 days we rallied up 5.5%.
And then next 2 days we dropped 6%.
And the next 5 days we rallied up 7%.
And the next 3 days we dropped about 9%.
Next, we rallied up about 7%.
The next 4 days we dropped about 10%.Culminating with the wash out on Oct 4.
And then in 5 days we rallied up 11%.
Sat around.had two big gaps into the highs of late August and then we did two big gaps down.
A little rally up.
Another big day down.
Within a day, a gap up. Then another big drop.
Went down about 9% in seven days.
And this week on two days that gapped up, a total of about 640 points.
We finished with a rally this week of 8% and this one was for the books. You couldn't get in because they were gaps.
Re: RE : Weighing the Odds of Probability
Scott Raynovich
12/7/2011 9:21:28 AM
Very cool analysis Fred... yes the chicken-or-egg debate is central.
I believe the volatility is driven by the size of debt and leverage. When you have everybody in the world leveraged with massive carry trades, some banks still at 30-to-1 leverage, combined with an uncertain economy makes for some very extreme potential scenarios. The market does not known how to price this.
Re: RE : Weighing the Odds of Probability
Fred Goodman
12/7/2011 1:16:10 AM
The chart shows volatility for the last 44 years (blue line) plotted against the S&P 500. Volatility is certainly elevated, though not even close to what it was in 2008. As you can see it has been just as high as it is currently for very prolonged periods between 1999 and 2003 and our indicators worked then. You make a good point though, indicators work differently when volatility is high and when it is painfully low as it was in 1994 and 2006.
Of the two, I prefer it when volatility is a bit high rather than a bit low, indicators work better.
That said, I will admit that the market is more difficult in the current environment than at any time in my experience, but the reason seems to be that we don't know what manipulations are going to be pulled by the various governments around the world that are causing the volatility rather than the volatility itself.
Re: RE : Weighing the Odds of Probability
Scott Raynovich
12/6/2011 12:38:15 PM
Fred,
I wonder if you have any thoughts on historical data and the new "debt bomb" regime we are in. I've noticed a lot of studies have been skewed in recent years by the unprecedented volatility we are in. For example two of the examples you have in this article were in 2008, but as we see the Morning Star proved fruitless in 2008 and we now know that 2008 was shot to hell by the banking crisis.
We now seem to be in a new regime where regularly functioning markets have disappeared and ever day is a low-liquidity market driven by speculations about potential gigantic government bailouts. It's a bailout-driven market.
So I guess my question is when you don't know what central banks are going to do on any given day, can historical data even be reliable any more given the risk of daily "Black Swans"?
--Scott
I wonder how much QE helped with the market rally. If you look at the charts, everytime QE was announced markets rallied 15% or more. I'm currious to know employment numbers after holiday season and how politics plan on tackling our own debt. QE 4 coming soon? Then QE 5? Plunge Protection Team been working hard with my tax money.
Past success
tokyogai
12/6/2011 9:29:16 AM
fred- an interestimng post. i guess as with any system you need to keep an eye on the newspapers. I think the Euro zone problems proabably account for the miss this year.
Re: Weighing the Odds of Probability
PAW
12/6/2011 9:22:52 AM
As always, very informative and educational post. Thank you. It will be interesting to see what the market does next.
Re: RE : Weighing the Odds of Probability
ProfR
12/6/2011 7:03:00 AM
Yalanand, You are right but a lot depends on how much of the present trouble in the Eurozone is already baked into the stock market. If most of the bad situation is already taken into account by the market and if things get better even slightly, then it is possible to see gains.
RE : Weighing the Odds of Probability
yalanand
12/6/2011 6:26:56 AM
@Fred, thanks a lot for the post. As alwasy very informative and intersting. I totally agree with you that past performance is not a guarantee of success for future investing especially when different events are unfolding rapidly. I feel lot will depend on 9th December eurozone meet.
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