Sep

5

Even with the recent pause in stocks that made Ben pause, volatility is still low and there has not been a steep decline in a while. How long exactly?

There are lots of ways to count this, but here is one: SPY daily closes 1993-present were checked to see if they were more than 10% lower than the high close of the prior 40 trading days (2 months). This method of screening does not specify the duration of the decline (bounded by 1, 40 days), only the magnitude, so the drops could span 2-40 days.*

Looking for declines this way does not eliminate all those nasty periods with many consecutive days meeting the loss 10%+ criteria, which clutters up attempts to gauge wait times between drops. To help with this, look-back days were counted only if the prior 3-days did not meet the 10%+ decline criteria.

Here are the ranked wait times, in trading days, between closes more than 10% less than the high close of the prior 40:

1160+, 388, 201, 161, 126, 98, 98, 50, 39, 39, 27, 24, 17, 11, 10, 10, 9, 9, 7, 7, 6, 6.

The top entry, 1160+, is from the start of the series in 1993, which you will recall from your almanac was another volatile period for stocks. The date of the next longest 388 day wait was April 2000, which more or less heralded the end of the 1990s bull run. (One wonders how many boys born 4/00 were named Herald).

History buffs will note that as of 9/1/06, the current streak without a big decline is 883 days-approaching the record length set in 1993.

Using macro analysis, compare and contrast the markets of the mid 1990's and today. Use this analysis to explain why volatility declined in both periods, and make a prediction of how many days are left before another down of 10%+. (This last bit turns the thing into an exam question for all the prof's on the list. If you use it please either send royalty of $0.25 to your ex-wife in my name, or mine in my name).

*this is a slight modification of something posted previously, only this way pins the day you look back from to survey your losses.


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