917 trading days since down 2% day

A Trader friend emailed this:

It has been 95 trading days
since we have had a down 1% close. This is 4.5 standard deviations from the
historical norm, which means a one in 260,000 chance of happening without the
intervention which we have seen.

It has been 917 trading days
since we have had a 2% down day at the close.  This is 6.13 standard
deviations from the norm, and the second longest streak since 1942. The odds of
this happening without the Fed’s intervention is one in 86,579,799.

It’s great to know that your
tax dollars are working hard to keep the financial system afloat. But what
happens when the support stops, or an event overwhelms the ability of the
Treasury to support the market? 

Paulson says that they have
been able to inflate stock prices more than enough to offset the decline in the
value of housing; but what happens when stock prices can no longer be pushed
higher without running into foreign sellers of dollar assets? Are we going to
buy back all of our overseas debt too?

Fascinating stuff . . .


Note: I received this a week ago, updated the days, but not the statstical odds. Also, I am not sure who the original author is — if anyone can direct me towards that person, it would be appreciated.

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  1. MarkTX commented on Nov 22

    to change the “irrational” market phrase a little….

    the fed can inflate (the market) faster than i can stay solvent

  2. anon commented on Nov 22

    If the stock market is being pumped artificially, they’re just adding more height to the cliff at the end.

  3. my1ambition commented on Nov 22

    Question: What would be considered “Fed”-ly intervention and how would we know its happening?

  4. anon commented on Nov 22


    Follow M3.

  5. fdg commented on Nov 22

    The original author is Bulldog that posts to Prudentbear message board. He posts a lot of statistics like that.

  6. Bill a.k.a. NO DooDahs commented on Nov 22

    Y’all need to remember that stock market returns are NOT normally distributed, and that certain statistical techniques, which have as their assumption a NORMAL distribution of data, are invalid for use on the markets.

    A Student’s t-test or other hypothesis test on 6.17 standard deviations is bu11s#it.

    According to Chebyshev’s theorem, the odds of exceeding 6.17 standard deviations on a non-NORMAL distribution are 2.6%.

    Mistakenly believing that statistical tests intended for normal distributions apply to the stock market has ruined many a hedge fund.

  7. hfanalyst commented on Nov 22

    Actually, I think the original author needs to brush up on his statistics.

    I just downloaded the daily S&P history since 1950. The average number of days between 1% declines is 10.91 and the standard deviation is 16.99 days, so the 4.5 sigma event claim is accurate.

    However, if you look at the distribution, it has significant positive kurtosis and skew, meaning attempting to use a normal distribution to describe the frequency of events is inappropriate.

    Since 1950 there have been 12 occurances of periods where the S&P went over 90 days without a 1% decline in 14,314 trading days, indicating markets should go at least 90 days without a 1% decline approximately every 1193 days (about 5 years). We haven’t had a period over 90 days without a 1% decline since 1995 (when it happened in both December and May, actually), so you could easily say we were well over due for a period like this.

  8. wcw commented on Nov 22

    Thanks for beating me to it, Bill-aka and hfa. I might have run the numbers a little different than the latter, and Chebyshev provides a lower bound and not an estimate iirc, but both suffice to make the point: market returns are not normally distributed.

    As a result, there is no simple statistical evidence that something is going on with the market. Cf a little chart I made when the VIX closed below 10. Volatility is just low, as it has been before. I don’t see that you can draw many conclusions from that fact.

  9. GS commented on Nov 22

    I do not know who posted the stats and odds of the current uptrend without FRB / US Treasury intervention.

    But I do know this, the bull run since the double bottom low in July is within the norm of the final leg of a bull market when compared to previous bull markets going back to 1800. The average final leg of a bull market goes up 13% – 16%. The SPX is up 15% as of this week, so price is at the topping range.

    If you want to know the details then watch a presentation by James Flanagan, a Gann cycle analyst. He has the deepest historical database of US stock indexes and commodities of anyone on the planet. I believe it took him 10 years to find ALL the data for ALL commodities. The stock index data was easy to find.

    He is a long term position trading advisor using futures. He went long SP500 futures in late 2002 and exited those positions in May 2006. I think he missed the last bull leg we are in now from the July low. In other words, he was long all the way up from the Oct. 2002 low using historical cycles to time his entry and then exit in May 2006.

    The presentation is well worth the time to watch whether you think you know it all or not. Time is an extremely important element to stock market up trends and down trends. History is a guide and the Flanagan presentation will put history into complete context for you. That is important in my opinion.

    part 1 (Stock Market Forecast): http://gannglobal.com/v
    part 2 (Soybean Forecast): http://gannglobal.com/v/s01
    part 3 (Crude Oil Forecast): http://gannglobal.com/v/cl01
    part 4 (Commodities: the big picture): http://gannglobal.com/v/crb01

    (copy and paste URL to browser)

    The bottom line is time is running out on the last leg of the bull market that started in October 2002. That means the cycles are topping out between now and March 2007.

    90 yr. cycle tops November 21
    76.6 yr. cycle tops November 17 – 20
    70 yr. cycle topped November 18
    40 yr. cycle topped November 16
    10 yr. cycle tops November 26
    8.6 yr. Global Business cycle tops February 27, 2007

    It is my opinion that if all US stock indexes close down hard today and near the lows of the day forming a key reversal day then THE top has been made. The reason is time and price have sync’d up and that is when major changes in trend take place.

    Today the Nasdaq Composite, Nasdaq 100, SPX, DJIA and the NYSE Composite hit my upside price objectives. The Russell 2000 so far is only 2 points from it price objective. It is extremely rare for most of the indexes to hit price objective the same day and within a major cycle top window.

    I am currently short SP500 futures at 1410.25 with a stop loss at the high of the day. If the market goes lower into lunch I will move my stop to breakeven and hold short through the holiday. By the way, major holiday’s have a tendency to turn the market also.

    This is really exciting for me and a lot of fun.

    One last thing, the move down off the high whether it begins today or in March 2007 will be at least a semi crash 20% or full blown crash 30% – 50% based on historical tendency after bull market tops.

    My balls are on the line now since Barry is unwilling to put his on the line in this blog. :-) Just pulling your chain Barry.

    Also I am not James Flanagan and do not subscribe to his service or have anything to do with him. I think his presentation is good and unique and thought it may be helpful to readers of The Big Picture.

  10. bodanker commented on Nov 22

    Great points Bill and hfanalyst.

    Another point: one shouldn’t assume an X% decline has the same significance across all market periods. In other words, an X% decline may be significant if volatility (by some measure) is .5X%, but it would be less significant if volatility is 2X%.

  11. anderl commented on Nov 22


    Pseudoscience in the Investment World

    From SkepticWiki


    Skeptics generally tend to focus on paranormal claims to point out problems with critical thinking, but these exact same problems exist in other areas as well, including the investment world. Investors in the market have a very strong incentive to make predictions, to look for indications as to how the market will do in the future. Unfortunately, they rarely use scientifically sound means to make these predictions. In fact, most of their techniques have more in common with pseudoscience. In particular, since numbers are very important in the investment world, it is especially prone to Numerology.

    Examining the investment world is an excellent way of demonstrating how skeptical thinking can be applied to all areas of life, not just the paranormal.

    * 1 Predictions
    * 2 Numerology
    * 3 Confirmation Bias
    * 4 References


    Skeptics usually like to point out the failure of predictions of psychic mediums like Sylvia Browne, who makes predictions for the upcoming year and then, when that year is over, tries to rework some of her predictions to fit what actually happened. However, predictions of investors are usually no more sound and have no better track record, and yet skeptics are largely silent on the issue, even as investors publish dozens of newsletters making prediction after prediction for the next year.

    Although few in the investment world will admit it, there just don’t appear to be any such rules or trends for reliably predicting the market to any degree of specificity. In A.K. Dewdney’s book 200% of Nothing: An Eye Opening Tour Through the Twists and Turns of Math Abuse and Innumeracy,[1] he examines the number of successful investment brokers and the level of their success and shows that, when viewed as a whole, they perform no better than would be expected by chance.

    Fortunately, there are those who readily admit it. Harry Browne’s book Fail Safe Investing[2] is based on this very idea. Also, in the commentary for the DVD Special Edition of The Princess Bride,[3] writer William Goldman recounts a conversation he had with investment manager Edward Neisser, who, when Goldman asked why the stock market went down, replied, “Because, Billy, it didn’t go up.” He went on to explain how the reasons why the market did what it did are always applied after the fact. On any given day, there might be reasons why the stock market would go down (a fire in a factory in the Philippines, say) and why it would go up (such-and-such corporation reported high profits). Analysts simply look for the reasons for the stock market doing whatever it did after they actually learn the results, but, like the Bible Codes, they seem unable to actually make the prediction before it happens.

    Numerology permeates the investment world. For example, in the late 1980s speculators predicted a rise in the price of gold; they looked at the rise of the gold price in the ’70s to make their prediction. In the first half of the decade, the price of gold rose by a factor of 5, which is a Fibonacci number. In the latter half, it rose by a factor of 8, the next number in the Fibonacci sequence. They predicted that the next rise in gold prices would be by a factor of 13, the next Fibonacci number. This would have made the price of gold rise to over $3,000. This prediction was clearly false.

    This example is not atypical. Investment advisors often rely on numerology, particularly Fibonacci numbers, to make their investment decisions even though there is no scientific evidence that Fibonacci numbers have anything at all to do with investment markets, and investment advisors have provided no reason why Fibonacci numbers should be significant. In his book Conquer the Crash: You Can Survive and Prosper in a Deflationary Depression [4] (2002), Robert R. Pretcher, Jr. used Fibonacci numbers to predict that 2003 would be an excellent year for short sellers (it wasn’t) and that by the end of 2004 the Dow would fall below 5,000 (it didn’t).
    Confirmation Bias

    The reason why people hold confidence in the predictions, and the reason why numerology is so prevalent, goes directly to an issue seen all the time with psychics and other paranormal phenomena. When selecting particular investments or picking which investment advisors to listen to, the concept of confirmation bias comes into play. The market might respond a particular way to an event on several occasions; an investment advisor might then make a prediction that, when that event happens again, the market will respond in the same way. But the advisor ignores all of the times when the event happened and the market didn’t respond to it in the way he’s predicting. With thousands of instances of investment activity every day, and years of it to look back on, it’s not hard to find sequences that fit Fibonacci numbers or any other pattern one cares to look for. As in the realm of the paranormal, confirmation bias is used both as deliberate fraud and as unwitting confirmation of patterns and trends and predictability that just don’t exist in the actual market.

    Unfortunately, confirmation bias leads people to believe that certain investors have a special talent or gift for predicting the market. Pretcher (mentioned above) gained popularity because of a lucky streak early in his career, leading up to the 1987 stock market crash. Since then, he has been almost consistently wrong, and yet people still buy his books and take his advice. Pretcher is not at all atypical; many investment advisors base their careers on a lucky streak, and although there are a few investment advisers who seem to have a very strong track record spanning many years if not decades (Warren Buffet is perhaps the most popular example), there just aren’t enough of them to think that there’s anything more to it than their chance placement at the top of the bell curve.

    Truly, the most accurate claim is always to be found in the standard disclaimer, “Past performance is no guarantee of future results.”

    * 200% of Nothing: An Eye Opening Tour Through the Twists and Turns of Math Abuse and Innumeracy by A.K. Dewdney
    * Money Talk with Harry Browne covering superstitions in the investment world (5.5MB mp3 file).

  12. prm commented on Nov 22

    Bill makes a good point about the assumptions made to get the probabilities mentioned above. The basic model of the stock market assumes a normal distribution plus a positive drift term (stocks tend to go up), this makes it less likely to go down than up. Also, even if you assume a normal distribution, there is no reason to assume that the standard deviation is constant. Smaller standard deviation (volatility) makes it less likely that there will be larger down days.

    One final point: Chebyshev’s theorem says that the odds of exceeding 6.17 standard deviations on ANY distribution are AT MOST 2.6%; they could, of course, be much smaller.

  13. GS commented on Nov 22


    I am using the same historical cycle analysis that lead Paul Tudor Jones to heavily short SP500 futures prior to the 1987 crash and cover and go long at the low. Historical trend analysis of the stock market or any market is very helpful in understanding the average time and price length of up trends and down trends. Since I am a trader and go both long and short the SPX I do not care what the market does as long as it moves up and down. And since it has been moving up and down since the beginning of time I assume it will continue to do so. By the way, I did post to this blog on July 20th that I was long off the double bottom low made July 18th. See Barry’s post entitled “One Day Wonders or True Bottom?”


    You see Anderl, as a full time trader I am forced to be long or short in order to have the potential to make a profit. I can not afford to waste my time having a mental masturbation session about government stats for entertainment. In other words, I only use information that will give me an edge to make a profit. Strict money management discipline is also necessary to survive as a trader.

    All the best to you in your investing / trading. I sincerely mean that.

    Good investing / trading to all.

  14. calmo commented on Nov 22

    Some sophistication with probability theory here

    …stock market returns are NOT normally distributed, and that certain statistical techniques, which have as their assumption a NORMAL distribution of data, are invalid for use on the markets

    to take the steam out of the less sophisticated who may wonder if the lawyers representing the embattled CEOs in the option trading scandal might have missed something.
    Sadly, in those cases the apparent low probability (no matter the lack of sophistication) drew attention to the empirical data that showed the CEOs were misbehavin…shucks.
    In this case does the apparent oddity generate enough suspicion to launch an empirical study (as per ‘my1ambition’) to determine if the Fed has intervened or do we wait another 917 days, bowing to the sophistication that knows what a normal distribution is and what isn’t?

  15. lurker commented on Nov 22

    Don’t gamble; take all your savings and buy some good stock and hold it till it goes up, then sell it. If it don’t go up, don’t buy it.
    Will Rogers

    Happy Thanksgiving to all!

  16. Bill a.k.a. NO DooDahs commented on Nov 22

    The analysis by hfanalyst points out that such low-volatility periods occur maybe once every five years with the last occurring in 1995, so this could be “due.” Another point by bodanker and others implies that some of the down moves in the last few years have probably been very strong, relative to the recent levels of volatility. This current situation is not really even an apparent oddity, except to those who want to fearmonger. I prefer fishmongering, myself.

    The practice I’ve seen used is “assume a normal distribution until proven otherwise” and it’s quite obvious to anybody who’s spent some time on the markets that they aren’t normally distributed. This is not a problem unique to financial markets, and I think most statisticians play fast and loose with their assumptions about distributions in most analyses – we need a healthy, informed skepticism about statistics. Math geeks use a normal distribution because it’s easier to disprove null hypotheses with a Student’s t than it is with Chebyshev’s, and null hypotheses exist to be disproved. Granted, Chebyshev’s gives us an inequality and a cap on the odds, but that cap is what you would use in a hypothesis test and the inverse gives the percentage I listed. If one had a distribution type that the returns of the market came close to matching, that is the distribution and statistical test most appropriate to calculating the odds of an event. However, the distribution of returns itself varies from year to year …

    Finding the theft through option-timing wasn’t a statistically strenuous event, really it was just a result of the data finally being examinable in electronic form. You don’t need sophistication to find the tvrd in the punchbowl, you just need to be able to step back and see the whole punchbowl. Without a database, even scanning for obvious fecal matter is problematic.

  17. wcw commented on Nov 22

    What you could do, if you really wanted, is construct an option-implied distribution on something like the OEX and SPX or wherever you have the deepest market prices, and run your analysis against that predicted distribution. At least you’ll get somewhere, though I am not certain how much predictive value those option-implied distributions have. Anyone know the literature on that?

    Option timing, I agree, was so ugly and obvious there is no real critique. The only question is how much those managers who engaged in it took from shareholders.

  18. bodanker commented on Nov 22


    I wouldn’t say I’m familiar with the literature – and I’m not certain this is what you’re referring to – but you’ll be able to find quite a few white papers on using fed fund futures and options to calculate the probability distribution the market is assigning to a change in the fed funds rate.

    The issue that makes the above analysis possible (I may be wrong though) is that the fed generally moves the fed funds rate in discrete increments, so I’m not sure it would apply to markets with continuous price changes.

    Hope that helps.

  19. alexd commented on Nov 22

    If the market crashes , the feds will likely lower interest rates, so banks will do well. bonds will do well. The dollar will go down. Euros will be nice.

    If inflation is the great problem gold and commodiites will go up.

    The problem might be will we recognize a change in trend and then have the wherewithall to act properly and decisively.

    Enjoy every sandwich! (Warren Zevon)

  20. Philippe RAFAT commented on Nov 22

    Fantastic page! every one seems to think that this trend does not comply with statiscal norms and rush to predict through statistical maths or stratospheric prediction a top, a date, better try cafe deposit or fruit peals.

  21. BKE commented on Nov 22

    Kudos to those highlighting the misapplication of normal distributions.

    Question: If a market has gone 95 days without closing down 1 pct, what is the probability that it goes another 95 days without closing down 1 pct?

    What assumptions are behind your answer?

  22. Bill a.k.a. NO DooDahs commented on Nov 22

    Here’s one for you. Did you realize it’s been 793 trading days since we’ve had a day where the S&P 500 closed up 2.2%? Wow, that’s a long time. You might say we’re “due” one of those events. After all, if you go back to 1980, such events happened 143 times or about once every 50 trading days (less than a quarter).

    We haven’t had a monster gainer day since Oct 2003!

    That day was separated by only 74 trading days from the previous instance in Jun 2003!

    But wait! In April 2003 we had a day that gained 2.6%!

    Holy schnikees! March 2003 had THREE days where the index gained 2.3%, 2.6%, and 3.4%!

    All in all, 2003 had 8 days with gains over 2.2%. 8 in 252 trading days, about twice a quarter.

    And we’ve gone 793 days without a +2.2% day.


  23. jkw commented on Nov 22

    Someone commented on this a few weeks ago, so I did some analysis. 1% and 2% down days both seem to follow a Poisson distribution fairly well. I did not actually analyze how close to Poisson the distribution is, but the graph looked right (exponential dropoff as the inervals increase). Assuming that it is a Poisson distribution, it is time independent, so the probability of going another n days without a 1% correction is independent of when the last 1% fall was. Likewise for a 2% fall. I don’t remember all the other properties of Poisson distributions, but standard deviations are not very useful for analyzing them. If it is a Poisson distribution, then how long it has been since the last one has almost no predictive value (although it could have predictive value when fed into a model that looks at other things too).

  24. ECONOMISTA NON GRATA commented on Nov 22

    Call me Old Fashioned if you wish. But if anyone thinks that Henry Paulson was hired to sit around and chew on his toe nails all day, you are badly mistaken.

    Having said that, I can only state that the events of recent Paulson history are not natural. The inflation of synthetic assets is dangerous, to say the least. It’s like playing a game of musical chairs with 50 players and one chair. The second the music stops, everyone is going to rush for that chair. There’s going to be biting, scratching, kicking and the undignified pulling of hair (pieces). Being a nickle short and not being credit worthy enough to borrow one, will be the cause. The effect, catastrophy…

    I will watch from my two legged stool here in my exile in Palm Beach, Florida where all endings are happy ones.

    Best regards,


  25. JDamon commented on Nov 22

    Bill, what are you doing posting a positive spin post? Didn’t you get the memo that this is a doom and gloom blog?


    BR: Jeff, you are drawing the wrong conclusion — so I’ll clarify it for those who care:

    I encourage debate, dissent, discussion. I want to see reference to otherr people’s work, thought process, analysis. Someone has to be on the other side of your trade — long or short — so everyone believing the exact same thing helps no one.

    What is not tolerated is multiple posting under different names, purposefully posting factually false data, willfully misleading people about your positions, and general troll like behavior.

    I also expect people to be civil to each other. I could work in the pits if I wanted to see alot of sharp elbows and hear foul mouths. And since this is my house, disrespecting me is the fastest way to get tossed out on your arse. This is not a Democracy, its a (mostly) benevolent dicatatorship.

    That said, nothing gets me more jazzed than a good debate — Justice Oliver Wendell Holmes’ Marketplace of Ideas and all that.


  26. Bill a.k.a. NO DooDahs commented on Nov 22

    I did get the feeling that y’all were “glass half empty” kinda folks.

  27. alexd commented on Nov 22


    There are people who have won the lottery more than once. I guess they should have returned the second ticket due to the fact that the odds of that happening espeacially based on the past, is so unlikely. Things due not have to happen in a time span that we can appreaciate. We look for patterns. In a an infinete number of discrete events we can have long runs. Or incredibly short ones.

    We think that because a levee will only likely fall under the stress of a hundred year storm that there will not be one for a long time. We make false assumptions about frequency of distributions all the time. You need a lot of events just to tell if something is repeatable.

    People do act in certain manners under different stresses so you can make a call based on that. and it will be somewhat unprecise. Might be correct but it will have wide variation. People might behave in a more repeatable manner than sheer numbers. Confusing the two aspects make all the conclusions almost useless. Unless you are right.
    Or wrong.

    Read Fooled by Randomness by Taleb.

  28. rb commented on Nov 22

    Let’s not forget that the conspiracy theorists assumed the market was being pumped to ensure a Republican victory at the polls. Well, the elections are long over…what is the motivation now?

  29. Philipp commented on Nov 22

    One answer to the puzzle:

    No strong surprises on the upside, just nice earnings quarter after quarter,

    and no terror bringing more drift to the downside. Madrid did affect Stock exchanges a lot. If a plane gets hijacked again, stocks are going down..

  30. sam commented on Nov 22

    The current (post-July) boom is global (see how India’s BSE sensex mirrors the DOW). Is the US treasury intervening globally ?

  31. Gold commented on Nov 22

    Housing market still in a free fall, need to inflate another asset class to offset the precipitous fall in the other. As a side note, everybody seems to think the energy component of inflation is dead…… 4q is seasonally weak, it might be tears all over again if the Fed has to go on another rate hike campaign ….. which currently isn’t even on the radar for most. Not to mention the 1000 + co’s estimated yet to come out of the closet on the options back dating scandal. Anybody who thinks we aren’t living in world awash in credit induced inflation has been living under a rock. Just check out a chart on M3 ; )

  32. Sceptic commented on Nov 22

    What ! The post-July boom is global ? Did I miss that ? The Sensex mirrors the Dow ? Wow! Too deep

  33. Barry Ritholtz commented on Nov 22

    I love it!

    Awesome discussion today —

  34. cm commented on Nov 22

    Barry: Minor procedural note — in that case, i.e. adjusting numbers to reflect publishing delay, you may want to have marked them as “quote edits” using [], as is usually done with stuff inserted into ellipses to fix grammar.

  35. anderl commented on Nov 22

    Not sure where to put this so posting it here. Here is a conspiracy for all of you. With the Yen carry trade build up to the size of a small moon any unforeseen rise in the BOJ rate would cause the carry traders to buy back purchased assets and return the borrowed Yen least they loose on the trade. I.E. Amaranth and the recent rumors of a Hedge fund imploding, selling energy assets and selling back Yen.

    The result of an unwinding of a carry trade would drive the Yen up against all currencies further exacerbating the financial losses of carry traders and causing more panicin the currency markets. ALL currencies that the traders leveraged against would fall and the Yen would bullet up.

    BOJ is seeing inflation in their country and with the spread between many rates across the globe relatively higher to the BOJ rate the carry trade continues to be lucrative. So to curb the inflation the BOJ is raising rates. But the first time they announced it cause a 7% run on the Yen to buy it back. And again when they raise a quarter point. Since then new blood entered back into the trade as well and BOJ selling more Yen to keep the market stable. This of course accelerates inflation and is the reason that the BOJ is threatening to raise rates again before the EOY.

    See the May to July sell of in global markets and compare it to the rally in the Yen. I understand that this may very well fall within the theory of finding a statistic that correlates with my own opinion but the Yen carry trade is so global that I think technically and fundamentally it is at least plausible.

    The Fed may have paused rates more as a result of the events driven by carry traders rather than any market sell off, housing bubble, or collapse in commodities. I think that most of those events are the effect of carry traders.

    So my premise is that we do NOT see any rate pauses in the US and instead see rate hikes by the BOJ. And an hidden-from-view-M3 Fed injecting liquidity into the global market to support an unwinding of the Yen carry trade to protect Japan from inflation. The BOJ can now engineer a gradual measured pace of jawboning followed by a massaged BOJ rate hike when the carry traders feel like having it.

  36. ari5000 commented on Nov 22

    A little off-topic but regarding GM —

    Fascinating to see Kirk bailing out – General Motors is going to drop like a rock now. That is one big ball of unfunded pension liabilities.

    I wonder if GM crashes and a bunch of Credit Derivatives get called to pay up for the defaulted debt if that might kick off a wave tightening in the $25 trillion (I think that’s ballpark) of CDS’s floating along. If some big bank gets nailed — forced to bail out GM’s problems… That’s the kind of big ass ripple that can really screw up a liquidity-driven rally, I bet.

  37. Gold commented on Nov 22

    The greenback is really started to get pasted again. VIX remains at historical lows……complacency is high. Asian economies will struggle to keep the pace of exports to US going with the dollar weakness. The Fed is in a box ….. if they lower rates the dollar risks debasement, if they raise rates economic growth will keep slowing. Interesting stripping out Q3 autos GDP growth was closer to .9%. Stagflation coming to a theatre near you. Junk bonds, leveraged buy-outs. This is starting to smell really good….. it could be a long cold winter for the bulls. And growth stocks that don’t pay any dividends selling for 20+ multiples with rather anemic top line growth……… Dell revenue up 3% and the stock rallies ~10%. Intel really lighting the world up with their revenue growth over the past 5 years too. What a joke. I hope i’m eating popcorn when they are using some of these worthless stock certificates as wallpaper.

  38. Mark commented on Nov 22

    get fn real, you talk about liquidity liquidity liquidity, then point out an “obvious breakdown” in a holiday shortened week with 99% of wall st on vacation, oh yeh almost forgot, its the same crowd that thinks overnight trading dictates the next day’s action bahhahahaa

  39. Vega commented on Nov 22

    VIX futures looking pretty good these days from the long side. Paper sold a bu77load of Dec 06 SPX variance this week to open (talking millions of ‘vega,’ but don’t kid yourself: it’s not vega its GAMMA, baby). Talk to most dealers and there is genuine fear of getting long vol. They are paranoid to get long and smug with their shorts and it’s a lot like it was in early May. Does anyone remember what it felt like when the FTSE moved 3% a day for months in 2001? How about when the NDX would whip around 300 (big) points in an afternoon? LTCM lost $1.5B being short index paper (it wasn’t all fancy bond arb). Don’t let me kid myself: it’s low and can stay lower, but the risk/reward it definitely way skewed to getting long now. Just get sneaky and cover 1/2 to 2/3 of your decay and be patient.

    Any color on why Citadel puked it’s head of US Equities?

  40. PK commented on Nov 22

    Great discussion today.

    GS – I remember the thread and reading your comments. How prescient they seem now. Reading the other comments from that day is a hoot!

    The Flanagan presentation was great, thanks.

  41. dsquared commented on Nov 23

    Come on chaps this is not difficult. “Time between rare events” is distributed negative exponential:

    f(x) = ae^(-ax).

    a= 1 in this case as we are dealing with standardised data and the standard deviation of an exponential is 1/a.

    CDF of a negative exponential is 1-e^(-ax), and the mean of a negative exponential is always a, so a 4.5 sd event would require us to evaluate the function at x=5.5 and a 6.13 sd event would evaluate at x=7.13.

    so, the correct p-value for 1% declines is 0.4% (1 in 244) and for 2% declines is 0.1% (1 in 1248).

    The way that the negative exponential distribution works is such that these long runs without rare events are much more common than they would be if the waiting time came from a normal distribution. If you’ve ever waited for a bus you will intuitively know I’m right.

  42. henrietta commented on Nov 23

    I never realized it’s that many days since we had a 1% close day or more astonishing for the 2% finding. Wow! The Intelligence Investors Survey come out with bulls at 58.5% while bears are at 22.3%. Perhaps it’s time to be cautious.

  43. Stock Trading Insights.Com commented on Nov 23

    Sedated trading as expected right before Thanksgiving day

    Major indices all closed in the green on a low volume day before Thanksgiving! Historically, the day before after Thanksgiving are usually bullish for stocks. Of course, volume also dries up since most of the big money are out of the market. A l…

  44. alexd commented on Nov 23


    It is always time to be cautious, that should not be confused with the bets one places. Knowing the risks on a time frame in a specific situation does not preclude being carefull even if you make a very aggresive bet. Great race car drivers are oftyen more cautious at 200 mph than the average person at 30 mph.

    Best of luck.

  45. my1ambition commented on Nov 23

    I gonna sound obnoxious, but I now understand why Warren Buffett doesn’t like worrying about these things.

    I think dsquared said it best “…long runs without rare events are much more common than they would be if the waiting time came from a normal distribution. If you’ve ever waited for a bus you will intuitively know I’m right.”

    Nonetheless, my two cents are, looking at the “Big Picture” unless you’re investing in great stocks and dollar-cost-averaging I think commodities will outperform stocks for a while regardless of what stocks do.

  46. henrietta commented on Nov 24

    Hi Alexd,

    I agree with you. Being cautious doesn’t mean you would not place your bets accordingly. Just mean that you have to be very discipline to get out if the trade goes against you.

  47. zentrader commented on Nov 24

    I would be curious to know what type of market action followed these prior instances of long stretches without a 2% pullback. The author somehow implies that this is a negative development rather than the alternative explanation that the stock market may be discounitng an improved economic situation 6-12 months out. Of course the bears will never even consider that possibility. Seems like the mantra of the ‘cult of the bear’ is that the market must go down and if it doesn’t then the rally can only be the result of the Fed is rigging the market. Am I the only one who finds this a bit ridiculous.

  48. Guy commented on Nov 27

    I think Anon’s statement, “follow the M3” is the key to understanding the stock market’s direction in the near term. The growth of M3, fueled by repo creation, has definitely contributed to the rise in the Dow. The correlation between repos and the Dow is clearly demonstrated in the chart posted at the Nowandfutures site (link here).

    The sharp increase in repo creation in Aug/Sept. is notable. It raises the question as to whether repo creation was accelerated in order to bolster the Dow for the November election and the holiday season. If repo creation moderates after the election, the Dow’s rally will probably stall.

    The reader’s email implies that Paulson’s Treasury is behind M3 growth, but I can’t tell what portion of the growth is due to the Treasury and what is due to the Fed. Crudele writes that the Treasury has been creating repos for several years, long before Paulson was appointed (link here). The Nowandfutures graph also demonstrates a relationship between repos and the Dow going back to 7/02, pre-Paulson.

    Another notable trend, since early ’05 (pre-Paulson), is that M3 growth accelerated much faster than M2 and MZM, as shown in the graphs in the prior post (link here). The Fed has probably used M3 rather than M2/MZM to stimulate the economy because the lending and investment activity generated by M3 poses little inflation risk, at least in the near term. On the other hand, M2/MZM had to be restrained in order to contain inflation. Indeed, M2/MZM growth have been relatively flat since the beginning of the year. I think monetarists would have been alarmed if M2/MZM growth accelerated before inflation had been contained.

    The issue raised on this blog and by many others is that the Fed is no longer reporting M3 (Now and Futures has found a way to construct the data), yet there is a risk of asset inflation posed by M3 growth. Crudele writes, “Experts worry whenever there is too much money – liquidity – in the financial system because it can lead to things like price spirals in the housing market and bubbles in stocks.”

    I’m curious about the extent to which accelerated M3/repo growth has contributed to GDP. Repos are loans to banks, and banks can lend the money out or invest it. The increased lending and investment activity will generate economic growth, which leads to higher tax revenue. The increase in tax revenues that has been attributed to the tax cuts might be partly due to the increase in M3. (The graph titled “Commercial and Industrial Loans at Commercial Banks”, on p. 14 of the St. Louis Fed document, shows an increase in loan activity in early 2004, around the same time that M3 growth started to accelerate. (link here)

    I also noticed the post about the change in Goldman’s commodity index, which led to a $6 billion sell-off in gasoline futures in September and October, leading to energy price declines for the November elections (link here). The change in Goldman’s commodity index, which placed downward pressure on the energy market, coincided with the increase in repo creation, which fueled the increase in the stock market. Savvy investors fled the energy market and made a mad dash for the stock market, figuring the Fed and Treasury would try to pump up the Dow for the November election. Now that the election has passed, I would look for repo creation to moderate, the Dow to stall, and for the energy and commodity markets to improve. It looks like this might have started last week.

  49. steven davies commented on Oct 26

    I’ve read this book too “Conquer the Crash” Robert R. Pretcher, Jr. used Fibonacci numbers to predict that 2003 would be an excellent year for short sellers (it wasn’t).It was the year of the atypical depression.

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