Instructive chart via Tickersense: It Has Been 928 930 days since the S&P 500 had a one-day 2% Decline. They also note that "the Dow Industrials have not had a 2% one-day rally in more than 500 trading days, either.”
Jim Bianco adds: “Not only has the S&P 500 gone almost four years without a 2% down day, it has been seven months since it has corrected 2% at all! This is the second-longest such period in 53 years.”
I frequently compare these markets to the last secular Bear Market, from
1968-1982. Note the cluster of these long no 2% corrections in that
period also.
Michael Panzner notes that "while the S&P 500 has not had a one-day sell-off of more than 2% since a 2.49% slide on 5/19/03 (930 calendar days ago), there have been four 2%+ rallies over that period."
Date S&P move
======= ========
6/29/06 +2.16%
6/15/06 +2.12%
10/1/03 +2.23%
6/16/03 +2.24%
These are indeed interesting times . . .
we’ve become so conditioned to low vol that a 2% daily correction will really spook this market.
http://www.dailyspeculations.com/wordpress/?p=799
Daily Speculations had some comments today about this as well.
welcome to managed capitalism: the only people not at risk in today’s economy are the capitalists…
Actually, an interesting stat might be a comparison of liquidity available at the times of those past market runs.
What about other major indices? How well do they correlate? What about a more volatile index, like small-caps?
I understand the cap-weight asset classes are substantially correlated, but I would still be curious to see if current trends in the S+P 500 are being supported by corresponding drops in the S+P Small Cap or DJ Wilshire5000.
Very interesting times indeed.
any correlation to brokerage fees that charged 2% of the trade in the 1960-1970s and bid ask spreads roughly around the same range. Very few daytraders back then. Mostly in it for the swing. A 2% day would simply be commissions. Pre-fiat markets were not conducive to average joe investment.
A lot of changes in regulations created a more capitalist market that may have not offered equal but at least better opportunities.
Do we have hedge funds to thank for this?
“Do we have hedge funds to thank for this?”
Liquidity, low interest rates (low margin rates), low commissions, low fees. Hedge funds are only a byproduct of a larger source.
Reversion to the mean will always trump, greed, optimism, liquidity and stupidity. Ergo: Kaboom, when? I have not the foggiest!
anderl,
Are you trying to say that having 2% commissions and large spreads reduce volatility? Could you explain how that would work? I would expect day traders to reduce volatility because they will take profits more quickly. Day traders can’t afford to be greedy and stay in until the trend is confirmed as over because a 0.5% pullback takes a large chunk of their profit on each trade.
jkw, Simply price destruction. Increased participation in any market by suppliers and consumers (financial markets you are both supplier and consumer).
With increased liquidity from more participantscompetition means that you increase returns by turning over higher volumes for smaller profit margins. It happens to all maturing markets until an external event changes the dynamic.
A nation that has a market that charges 2% fees for all transactions will not get as much investment capital entering its markets as one that only charges a flat fee. And then if the flat fee is proportioned to match the afford-ability of the low to middle class citizen then you have increased your potential investor class and the amount of capital you can transact against. You don’t need to have as much volatility.
Before the SEC forced changes on the financial industry in the 70s a 2% fee (4% roundtrip) plus another 1-2% bid ask spread would put you in the hole 5-6%. At that point annualized returns were lower than the average 7% so you are already 1-2 years behind the curve. Thus participation was low and the market was flat even though corporate america was strong through that period.
Now I’m not saying that there volatility will dry up completely. I’m saying that on average it will fall away until a dramatic event brings it back. In the brokerage industry transaction fees would have to fall away to a level where they become so tight that profit margins start to shrink and as a result competitors start to fall away as no new participants enter the markets and those in the market can’t afford to stay in it. The results is a dramatic event which forces
survivors to force price change and as a result volatility.
We can thank a complete breakdown of the monetary system because of cb ignorance. The harder the system keeps pushing markets like they are now the greater the fatal dislocation is going to be. Its inflate or die.
good thing markets only go up nowadays cuz the Chinese are mortgaging their homes and using credit cards to raise trading capital.
I know I will sleep so much better knowing that….NOT!
Wait til the boomer retirement IRAs start pulling money out….
It’s hard to say what we are looking at. The market may have changed for the better with the advent of the net and the new information age. Those earlier markets did not see a lot of program trading either. Considering the huge step we have made over the last decade correlations with the past are about as risky betting with them as against them. You know what they say, most generals usually fight their battles based on the last war’s technology.
That could be the case here as well. It’s best to keep a wary eye on Mr. Market but also to give him the benefit of the doubt that there is a remote chance he is heading off in a new direction. We have just crossed a quantum information shift. It is safe to assume many more things will change as well including old paradigms
The more important question is WHY WE HAVE HAD THIS STREAK?!
Too much cash chasing a shrinking supply of equities!
Does anyone see this changing?
BTW, read Jeff Saut’s recent post on Minyanville, where he endorses CalDive’s margin expansion, “platform” company arguement. This streak coukd last quite a while. Any hiccup will be a gift!
Here’s the link to Saut’s endorsing GaveKal’s thinking (sorry for the typo in prior post):
http://www.minyanville.com/articles/index.php?a=12038
anderl,
You’re contradicting the chart. Volatility was low in the 60s and 70s (as viewed by how many long streaks without 2% down days there are). It went up in the 80’s and didn’t decrease again until 2003. But you’re argument is that reducing fees will reduce volatility, when the data shows that volatility went up as soon as the fees were reduced. It is generally agreed on that the period without many 2% down days in the past (the late 60’s and 70’s) was part of a secular bear market. The whole way through the secular bull market a long streak of no 2% down days was followed by a decline once one happened. So if you assume that the pattern holds, we are either in a secular bear market or we will get a large decline once we get a 2% down day. Either way it would be a sell signal (unless the market crashes).
I actually produced this chart several months ago and determined that a 2% down day after a long period without one generally means the market is about to change directions strongly. The long streaks without 2% down days tend to be strong trends, and the 2% down day at the end tends to signal a sudden change in direction. So when we are in an uptrend, it would be reasonable to expect a 2% down day to signal when you should sell.
The other thing I determined was that 2% down days seem to follow a poisson distribution (but I determined this by looking at the distribution graph, not with any statistical tests). Given the small number of long periods without one, I don’t actually think they are of any signifigance.