Saturday, February 10, 2018

"Thoughts On Dealing With Historically Abnormal Markets"

Huge caveat up front:
Quant stuff is only about odds and shading those odds in your favor. It is not about forecasts. What that means in practice is: to capture the advantage in events with 501:499 chances of occurrence you must put down a few thousand bets just to diminish the influence of the natural variance or, possibly more importantly, our old pal

https://i0.wp.com/balhiserfinancial.com/wp-content/uploads/2012/06/SemiVarianceW_nsq.gif
semi variance.
And what that means is you must have both the wherewithal to make many, many bets and the risk management tools to keep on top of those bets you have out.

That said, here's Quantifiable Edges, Feb. 9:
I have discussed some lately that the market is acting outside of historical norms. Thursday’s action reinforced that. The pullback has come so fast and been so extreme that it is going beyond even many of the most extreme moves in similar situations. For instance, I looked back to 1960 with the SPX for to find other times SPX closed down > 10% from a 250-day closing high within 2 weeks of that high. Thursday marked the 1st time this has ever happened. If I loosened the criteria to a 9% drop from a 250-day high within a 2 week period, then there were 2 instances. They occurred in 1980 and 1986. Below are charts of them.
http://quantifiableedges.com/images/2018-02-08.png
I don’t read too much into just two instances. They did both bounce in short order, but more significant to me is that SPX is doing something it has never done before with the 10% drop from a 250-day high within 2 weeks. Running the same test on the Dow I found only 2 instances. They occurred in 1928 and 1933. So you need to look back 85 years to see such a sharp drop from a high level....MORE