1% AND 2% market drops

Note: cited and shared by Bloomberg and Globe&Mail and other prestigious news outlets; also latest tweet on this topic is here


There has been an astounding absence of 2% or even 1% single-day drops in the market recently, raising the odds that we will see both (and perhaps within the context of a 5% or so multi-day correction).  Consult our previous article we've long-forewarned the scarcity of such broader corrections globally, and how such a streak would soon unravel. 

Now just a 1% drop in the market generally is a weekly event, but notice that for all of July and August 2017, we have instead outright escaped even this minor 1% daily decline.  The worst day in each month was just shy of -1% (it was -0.9%!)  But beyond that, we can also see that we have not had a 2% or worse (pink and purple colors) market drop since September 2016 (10 months ago!)  Something we should’ve instead seen every couple months.  To be fair, we’ve instead endured a couple of worse, 3% (purple color) single-day shocks, in the past couple of years.  The most recent being over 13 months ago, following the Brexit vote.  From a risk-theory perspective, these 3% market drops partially subsumes the scarcity we have in the 2% drops.

 

But not fully, and like the shortage of 1% drops, we are also equally long “overdue” in expecting a 2% daily pullback.  Obviously a 1% drop has a greater probability than a 2% drop, but both statistically, far belated.  While we have gone a lengthier stretch of over four months, from the time of the Trump election through February 2017, without a 1% market fall, this could partially be explained (as we have above) by the fact that then we had a few 2% and 3% pullbacks within that 12-month window.

Not anymore.  And risk-free market streaks eventually revert and provide more opportunities for downside drops: single-day types as well as broader corrections!  For example, we expect to conditionalize on us experiencing at least a brief pick-up in risk-off trades.  Which would permit the return of not just a 1% daily market drop, but 2% daily market drops as well!  It is very likely that both will occur in a weekly downdraft that causes many global indices (chiefly those that have up to now momentously run-up) to soon tumble at least 5%.