Jan

30

The exercise of counting something by hand always teaches much more than can be learned by allowing a computer to do the work, and, even with a computer, I always like to enumerate the observations in order to go over them one by one.I believe that this type of attention to detail is what everyone should do when they are trying to improve or win at anything.

The same type of counting that one uses in cards, to count the number of aces and picture cards that have already been played in a game, is what I was doing last night to look at large daily moves in the S&P. Where have all the big moves gone?

In the following study I defined a large move as a daily percentage change of one or more either way, in S&P futures.

Number of large moves by period:

Jan. - June '03 — 51

June - Dec. '03 — 24

Dec. '03 - June '04 — 24

June - Dec. '04 — 21

Dec. '04 - June '05 — 17

June - Dec. '05 — 13

Dec. '05 - June '06 — 15

June - Dec. '06 — 09

There were an average of eight and a half large daily moves a month in the first half of 2003, and then four a month through to December 2004. There were three a month from the beginning of 2005 to the middle of 2006, and one and a half per month in last six months of 2006. Finally, January and February 2007 have two and one large moves respectively.
During the four years I looked at there were 91 large declines and 85 large rises. With the market going up about two percent a month, the small changes tended to be rises, and the big changes were skewed positively overall.

There was a tendency in the most recent years for the big declines to cluster. The expected number of big declines per month since 2005 has been one and a quarter. If the big declines were independent, the probability of finding one month with four of such is 0.01, and the probability of finding one month with five of such was 0.002 Despite this there were two months with five declines and one month with four.

There was a tendency for the months that had a higher number of large declines to also have a higher number of rises . Starting with 2004 there were four months with four or more large declines, and during these months the average number of large rises was two and a half, versus the regular average of one and a quarter. Such a difference has a twelve percent probability of arising through chance factors alone.

Except for the first six months of my study, when there were seven or more large changes in per month, there was no evidence for serial correlation of the data, with the only three months with a high number of large changes recently being April 2005, and May and June 2006. The former was preceded by a very normal month with just 3 large daily changes.

There have only been three declines of one percent or more since November month end, which occurred on December 12th, January 3rd, and January 25th. Each of these declines was exactly 1.17%, amounting to exactly 16.90 points down. During this two month period since November end, there have been no occasions where there has been a rise of one percent of more.

Since July 2006, there has not been a single month with more than two large day moves, and such a period has only occurred twice before in recent history.

Such are the regularities that emerge from a simple hand and eye study, and one has doubtless missed many more.

Craig Mee quotes an article from the WSJ: 

Is an End in Sight for the Dow's Long Run?

By many yardsticks, stocks are getting stretched. Perhaps the most convincing argument: It has been 978 trading days since the Dow Jones Industrial Average has seen a 10% decline from a high, the second longest such run on record, says Ned Davis Research. The Dow has gone 135 trading days without a 2% decline, the longest stretch since 1958.

The Fed's pause in rate increases last summer helped propel the latest leg of the advance. Why the market has risen for more than four straight years is less clear. A stable economy has clearly contributed, and other factors also seem to be helping.

A big reason for the gains: a strong run of corporate profits. Another key is low interest rates. Since October 2002, when the rally started, the yield on 10-year Treasury notes has averaged 4.3%, well below the daily average of 7.1% since 1962.

But there's reason to wonder whether these drivers might falter. In the latest round of earnings reports, roughly three times more companies in the S&P 500 have issued cautious guidance than on average, says Thomson Financial. Meantime, the yield on the 10-year note is creeping close to 5%. Last spring, when the yield on the 10-year note topped 5%, the Dow gradually fell 8% over two months.

If earnings waver, or if long-term rates keep rising, the Dow's long run could end.


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