Investing with the Moon

Posts Tagged ‘1% down days’

Updated long term scenarios and charts.

Posted by Danny on January 23, 2018

Time constraints have kept me from blogging frequently in recent months. Today I will do some catching up by reviewing the long term scenarios and indications we have been covering.

Long term readers will remember my Dow 32000 series, which I started sharing in 2013: The case for Dow 32000. Many people declared me crazy, because the Dow was still below 15k and the internet was full with bubble and crash warnings. The Dow is now above 26k and the forecast doesn’t look all that crazy anymore. Meanwhile some of my colleagues are still peddling bubble and crash warnings. I am sure they will be right some day, just like you will inevitable be right eventually if you keep calling for rain on blue sky days. But investing is about making money, not about being right eventually.

So first off, here is the updated version of my long term monthly chart from December 2016 ( see: Dow 32000 revisited):

^SP500 (Monthly) 3_1999 - 1_2018

No need to change anything here. The market has kept rising along the dashed grey line as expected and ended 2017 right into the first pink target ellipse. The move may be near its end, but the odds for an extension into the second pink target ellipse (around autumn 2018) are going up. The reason is that real volatility has stayed so low, and normally you get higher volatility in the final stages of a big move (more on that below). If the S$P 500 goes on for another 8 months and gets in the 3000+ zone then the Dow will also be near to our 32000 mark. A drop below the grey dashed line would tell us the bull market since 2009 is probably over.

Some readers have been pointing out that my 88.4y cycle is due for its peak. That’s true, but a cycle that has been observed only a few times is hardly a hypothesis, not a very reliable indication. We will need a few thousand years of stock market history before we can tell if that cycle shows up with any regularity. Also a cycle of that length should not be expected to work perfect to the month. If the bull market peaks next September it would still be a good match for this 88.4y cycle.

The solar Saros 127 will revisit us in 2019. This Saros has marked both the 1929 crash and 2001 crash (and 9/11). See: The Saros cycle and the stock market. So, it is quite possible this bull market will stretch into 2019 under increasing volatility.

There are two reasons why the odds for another year of bull market are pretty good. As I wrote in February and March 2017, a dearth of 1% down days in the S&P 500 has historically been a bullish omen for the next 12 months. Very low volatility tends to mark the middle of big moves, not the end of them. See: We got a 1% down day, what next? A 109 day period without 1% down days had just ended, but we are already in a new one, now at 107 days and counting. So here is the updated list:


Once the current series without 1% down days ends we can expect the market to climb an average 14.8% over the ensuing year (if historic tendency keeps up). That would mean S&P 500 well above 3000 in early 2019.

We are also on an extremely long streak without 2% down week, as explained in this article from last July: Why the VIX is so low and why you shouldn’t worry about it yet. We still haven’t seen a 2% down week since I wrote that article and the current streak is up to 71 weeks. We have to go back to the roaring and 50s and 60s to find longer periods of “painless investing”. Here is the updated list:


Twenty more weeks and we would break the record from 1959. More important is what happens after the first 2% down weeks that comes. It will panic investors for sure. But again the historic average shows us that the market tends to rise another 10% in the 12 months after that first 2% down week that ends a long period of “painless investing”.

So, that’s where we stand right now. Could it be that historic tendencies will fail here and the market will suddenly crash without giving any advance warning in the form of increasing volatility? Of course, that could happen. Nothing can be ruled out. Just know that the odds are not in favor of it, if history is any indication. That’s also why VIX stays so low. Once we start getting more 1% down days and more 2% down weeks we will know that volatility is increasing and then I would expect the VIX to go up even though the S&P 500 may still be setting new all time highs. That would be a clear indication that the bull market is on its last legs. Until then I would just go along with the flow, with normal levels of caution.

Posted in Market Commentary | Tagged: , , , , | 5 Comments »

We got a 1% down day, what next?

Posted by Danny on March 22, 2017

The S&P 500 dropped 1.2% yesterday and this ends a 109 day streak without 1% drop. This is only the 13th such +100 day period since 1950 for the S&P, see my February post.
This drop was met with panicked reactions and crash warnings on social media, but people forget that 1% down days in the S&P 500 are nothing special. Over the last 67 years the S&P 500 has had 1662 such down days, or 10% of the time. That’s about one 1% down day every two weeks on average. But traders have very short memories and when something hasn’t happened for 5 months it feels as something special already.
The previous 1% down day was 11 October 2016, do you remember it? Probably not.

What’s more interesting is what happens after such a long streak ends. Here is the updated list of +90 day periods:


While most investors intuitively think that a first big down day after a long absence of such days is a bearish sign and maybe the start of a crash, history shows us otherwise. More often than not the market just keeps climbing after that first big down day. Two weeks later (10 trading days) stocks were higher 8 times out of 13. After two months (40 days) the market was higher 11/13 for an average gain of 3% ( = 19% annualized). And a year later the S&P 500 was higher 11/13 for an average gain of 14.8%.
While this doesn’t guarantee similar gains in the coming months, there is certainly no reason to believe that yesterday’s 1% down day is a very bearish omen. If anything you should probably use this drop to pick up some cheap long term call options in the coming days. That’s the counterintuitive thing to do here.

Sure, this drop does some technical damage and has probably shocked a few investors. A trend line is clearly broken and now the market will search for a bottom from which it can start to rally again. How long that healing will take is a guess at this point. I like to keep an eye on my aggregate stats for bullish and bearish stocks in S&P 500. This is what we have at the moment:


The number of S&P stocks in bullish mode (red line) has dropped to 230, which is below 50% for the first time since early November. Stats have been weakening slowly since early March, very similar to what happened in Jul-Aug 2016. When the red line bottoms out it will be a first positive development and when it gets back above the blue line we can start thinking about a new sustained rally.
I wouldn’t be surprised to see the market test the bottom orange trend line in the coming week or so. And that’s where it will get interesting.
Patience pays.

Posted in Market Commentary | Tagged: | Leave a Comment »

A long absence of 1% down days

Posted by Danny on February 24, 2017

The S&P 500 hasn’t had a 1% down day (on a closing basis) since 11 October 2016. That’s 92 trading days without a more than 1% decline, the longest such streak since late 2006. If the market keeps this up a few weeks more then the current series will join the 100+ day club, which would be the first since 1995.

Investors generally don’t care about days when the market goes down 0.4%, 0.7%,… But when benchmark indexes are down more than 1% in a single day then it stings. Since 1950 there have been only 12 occasions when the S&P 500 went more than 100 trading days without a 1% decline. I wanted to see how the market performs in the weeks and months after such a long streak ends. Here is the list including the 2006 streak, which ended at 94 days:


The table shows the ending dates and how many trading days the S&P had gone without a 1% drop. The longest such period was 154 days, which happened twice. The next columns are more important, showing the market performance in the 10 days, 40 days and 250 days after a long period without 1% down days ends. This is trading days, so roughly corresponds to 2 weeks, 2 months and 1 year after the 1% down day that ends a streak.

On average the S&P climbed 0.77% in the next 10 days, 3% in the next 40 days and 14.8% in the next 250 days (= 1 calendar year). To put that into perspective, since 1950 the average performance has been 0.33% in 10 days, 1.3% in 40 days and 8.7% in 250 days.
Somewhat surprisingly we see that the market has performed much better than average after a 1% down day that ends a +100 day streak. Intuitively one would think that the first serious down day after a long period of relatively “painless” trading would often start a more serious downturn. But that happened only once, in 1957 when the S&P dropped more than 10% in the next 40 days. Most of the time that 1% down day was a great buying opportunity for the short and medium term.
The reason seems to be that such 100 day series tend to happen in the midst of multi-year stock price advances and not towards the end of them. So, when that first 1% down day finally comes there are usually several months if not years left in the ongoing bull market.

The problem with this kind of studies is that it suffers from the “law of small numbers”. We have only 12 historic cases, so we cannot be very confident the same will happen again. Here is the list of streaks that were 50 to 90 days long:


Obviously those shorter streaks without 1% down days have been more common, but the subsequent market performance shows a totally different picture. Now we get a -0.4% in the next 10 days, -0.5% in the next 40 days and an average gain of 4.7% in the next 250 trading days. This is significantly worse than the average over this test period.

The current dearth of 1% down days will end sooner or later. But will it be a buying opportunity or not? On the basis of the history of 100 day streaks we would say yes, but the second table of 50-90 day streaks suggests that our 100 day club may have been very lucky. It is a good example that shows us how careful we should be with anything that has been observed only ten or twenty times.

Posted in Market Commentary | Tagged: , | Leave a Comment »

%d bloggers like this: