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SPX after 15% correction

Posted By Barry Ritholtz On May 12, 2005 @ 6:48 am In Markets | Comments Disabled

Chart of the Day illustrates the
average percent change in the S&P 500 during the first 1000 trading days
following a major stock market correction of 15% (or more).

The chart illustrates
that the market tends to achieve the majority of its gains during the first two
years (504 trading days).

click for larger graphic

20050511 [1]

courtesy of Chart of the Day [2]

>

CotD [3] explains the reasons for the reduced gains as rallies age: 

First, longer rallies have not tended to result in proportionally
larger gains. Second, most rallies have not lasted 1000 trading days. Therefore,
more significant corrections are included in the gray average line as it
approaches 1000 trading days. For example, half of the rallies since 1950 lasted
less than 600 trading days. Regardless, the current rally has been extremely
average.

I like to use historical averages as a very rough outline for present investing theses. If you do this, you must keep in mind the normal distribution curve (i.e., bell curve), and the likely probabilities which exist above and below median.

And, there is always the possibility of a "Black Swan event [4]" — something so unlikely that many investors deem it impossible. Kinda like GM stock going up as its bonds go down (Whoops).

The chart above makes it appear that most of the gains  in this cycle have been already made. However, if we see a significant selloff, then there is money to be made on the upside — but on risk/reward basis, only from near that low. From recent market levels, its a higher risk, moderate reward proposition.


Article printed from The Big Picture: http://www.ritholtz.com/blog

URL to article: http://www.ritholtz.com/blog/2005/05/spx-after-15-correction/

URLs in this post:

[1] Image: http://bigpicture.typepad.com/.shared/image.html?/photos/uncategorized/20050511.gif

[2] Chart of the Day: http://www.chartoftheday.com/20050511.htm?t

[3] CotD: http://www.chartoftheday.com/

[4] Black Swan event: http://www.amazon.com/exec/obidos/ASIN/158799190X/thebigpictu09-20

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