vital measure: no 1% drops

Update: the Trump rally continues!... my analysis cited in Forbes, Bloomberg, and Most Popular The Wall Street Journal Network's MarketWatch, cover story. Latest here.

As presciently told multiple times over the past month (here, here, here), the markets will only slowly hum upwards, carving out new record highs weekly!  George Soros and others betting short the market, or simply holding a dour view about the global market reaction to President Trump, have been left in the dust once again (this time exhibiting pussy hats, which  per Warren Buffet's 2^nd-in-command says it all).  And lately there is no shortage of market annotators churning out bogus market wisdom concerning the current streak they couldn’t predict, and searching for more meaningless examples:

• without a 0.5% drop (17 days)
• without a 2% drop (114 days)
• moves beyond +0.1% (yesterday it was at 1 day)

This is all senseless examination that provides no information about the future, despite puerile attempts to data-mine and try to show value-add.  True breaks in random market performance exist when there are truly erratic events.  And in order to measure this we can look at the data both empirically or theoretically, meanwhile converging on an expressive result.  Amazing by how round this number is, the S&P has a daily standard deviation (σ) of almost exactly 1%.  So a -1% move should happen outside of a 1σ event (16%).  Or a frequency of 1/(.16).  Once every 6 days. 

Empirically as well over the long history of the S&P, the markets have fallen below -1% once every 6 days!  However if this feels unusual, then it’s because the last such drop has been 92 days ago.  Or 16x [multiple of (92+1)/=16].  We show both the 92 and the 16 data on the left and right axis below.  The supplementary 1 in the numerator of the above formula is to account for the drop-day themselves.  Also this 92-day streak also equates to an extreme 1% event!

Of course it is impossible for all streaks (e.g., -2%, -½%, +1%, etc.) to be at the same rare consequence.  Some change in the markets must occur each day, and so as one part of the distribution above becomes rarer (e.g., -1%), another part must become provisionally more common (e.g., +¼%, +¼% to +½%, etc.) 

The key with this market is to know that the importance of various streaks shown in the chart are conditional based on how intermittent they are, at the time.  Market volatility (or lack of volatility in our current case) is only relevant during the lengthiest streaks (and even then mostly only during high volatility periods -which we are not in one right now- does this matter).  While financial media would need to fill in the news otherwise on the many more uninteresting days, we see momentum in the final day of these lengthy streaks momentously moving in the direction of higher volatility.  For low volatility regimes there is a lack of mean reversion otherwise, and for high volatility regimes there is mean reversion (difficult however to profitably trade off of!)  See here, and here.

The bottom line is one should continue to sit tight and avoid risky hedges at this time.  Enjoy the profitable rise.  But do know that the market again will at some point collapse pugnaciously (here, here, here).  Meanwhile but don’t be misled by phony market “authorities” who pass off loads of ill-advised market timing (let alone groping for practical probability analysis on their small number of skewed outliers) to again suggest the market streak end is nigh.