Its always dangerous to try and guess precisely when a selloff such as this one — a Selling Stampede in the words of  Raymond James’ Jeff Saut — will end.

But Jeff has done some work on this issue, and he’s made an intriguing discovery:

"Like ‘buying stampedes,’ selling-stampedes typically last 17 – 25 sessions, with only 1½ – 3 session counter-trend moves (rallies/pauses), before they exhaust themselves on the downside.

More often than not that downside exhaustion is punctuated with an ‘I think I am going to be sick’ downside hour or two.  It is also worth noting that once you get into one of these downside-skeins, if said stampede surrenders more than 5%, then the waterfall-decline tends to extend into a 10% or greater decline."

Today is day 20, according  to Jeff’s count. That implies this will likely end sometime next week, with the 25th day coming on Wednesday, June 15.

Jeff notes, however, that some stampedes have extended for 25 – 28 sessions, but it is rare for them to go more than 30.

That means this is a probability play — and not a sure thing . . .

Category: Psychology, Technical Analysis, Trading

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

36 Responses to “How Long Do These Selloffs Last?”

  1. BIG says:

    Nice to see some empirical work from a good strategist …. tired of all the guesswork/theories

  2. Mike says:

    Overlay these factors over seasonality and see how things deviate then.

    Seasonal factors overpower these backtests and skew the the numbers.

    I’ve backtested some advance/decline indicators, VIX indicators and TRIN – and taking into account seasonality and strong seasonal tendencies helps a lot.

    For ex. trin should have led to a snap back rally, 90/10 down days should have left to a snap back.

    What’s stopped all this? Seasonally, this week is a downer. Nearly 100% of the time.

  3. Bob A says:

    tickersense had an interesting note on this today…

  4. me2200 says:

    I think we have a long, long way to go. I find it very interesting that the emerging markets sell off every night after we do.

    There isn’t enough volume to make this a real sell off yet.

    ONE OF THESE DAYS I EXPECT A HEDGE FUND TO GET IN TROUBLE. Maybe after today, because oil and oil stocks are starting to get hit. WHEN A BIG HEDGE GETS IN TROUBLE, THEN WE WILL REALLY SEE A SELL OFF. Mark my words. Does anyone remember what happened in November in oils ? Make that market wide and you get the picture.

    Remember that the BOJ will speak later this month. That should be interesting.

    I think we are seeing the start of a liquidity crisis. US Fed tightens. BOJ tightens. Mortgages are being renegotiated. Highly leveraged investments are getting margin calls.

    Credit card and vehicle financing was record high in April.

  5. Thom H says:

    No, No, No, you guys have it all wrong. All the market needs to cure it is a little bombing run on Iran!

    Paste the link and be educated! or just amazed perhaps.

    mediamatters.org/items/200606060009

    From Fox news and Jonthan Hoening of CapitalistPig Assest Mgmt. LLC

  6. GRL says:

    Mark my words: The BOJ isn’t going to tighten.

  7. Greg says:

    stampede? the market is still up for the year and the decline from the peak doesn’t even qualify as a “correction” as the term is often (over)used. this will have to get much worse before people really feel pain, unless short-term memories and the moral hazard the fed has created relative to market activity is even worse than i thought.

  8. vf says:

    BOJ may not raise rates but they have already tightened a bunch.. have w/d 20 trillion yen out of banking system over last month or so (see Barron’s Asian Trader 3/29 “Sayonara Liquidity”). will be interesting to see how they trade the nikkei tonight.
    any elliot wavers out there with comments on the charts.. it seems like this sell-off is unfolding in a vivid elliot wave formation. today may have confirmed the kick off of wave 3 down.

  9. Mr. Beach says:

    I watch Asian markets overnight. (Easier to do with the 3hr advantage of the West Coast.)

    Primarily, I watch Japan, HK, and India. Japan and HK are easy to understand.

    But why India? India’s main index has a huge 52-wk range: 6,737 to 12,671. On May 22, India’s market was halted after the index dropped about 1100 points. It recovered after the market was reopened.

    The index closed last night at 9,756.

    India is a huge “story”. Foreign funds have been piling on for quite a while.

    India will continue to be a useful canary for global markets.

    Track the Bombay Sensex here:

    http://finance.yahoo.com/q/bc?s=%5EBSESN&t=1d

  10. Greg,

    I understand your point — but remember:

    The Nasdaq is now at 7 month lows; Its down 10% form its peak — which is lot more than its totaly gain was for the year at its high; the SPX is almost flat, and the Dow is 200 points — one ugly afternoon — away from flat.

  11. jlj says:

    do you guys ever worry that everyone on this site is a BEAR… who’s the contrarian ?…. makes me a bit concerned

  12. erik says:

    this site is the ying of the “street’s” yang. as for your concern, i would rather be squarly on the rational fringe than in the pants of mother goose.

  13. Mr. Beach says:

    jlj: Bear / Bull — these are just labels.

    Thoughtful investors look at data and develop an operating model. As new data comes in, they update their model. Whether the model says to BUY or SELL is an independent result.

  14. me2200 says:

    “I watch Asian markets overnight.”

    Me too.

    “India is a huge “story”. Foreign funds have been piling on for quite a while. India will continue to be a useful canary for global markets.”

    That is why I think sooner or later we are going to see some hedgies in trouble and then the REAL selling will occur.

    Oil is starting to get hit and hedgies are heavy into it. Because it is a sure thing, of course. They are also heavy into emerging markets and they have gotten hammered. The loses in most emerging markets are way worse than ours. You have to wonder why people keep their money in a market when it loses 15 or 20% with no apparent bottom in sight.

    One of these days we will awake to a DOW open of -200 points and it will only go south from there.

    I find the market being spooked by BB’s speeches to be funny. Just wait until we get a BAD employment report or a bad housing foreclosure report. Then you will really see a sell off.

  15. me2200 says:

    “It seems to me that Bernanke is being portrayed as a one man wrecking crew by a lot of people who have trouble dealing with reality.”

    Truer words have never been spoken !

  16. Mark says:

    This market is more nervous than a virgin on her wedding night.

  17. adam says:

    me2200:

    You are absolutely correct. This is a hedge fund/trading desk deleveraging event (which, in turn, has forced everyone else to deleverage).

    Once portfolios have been made more sound, we’ll have found a new, lower trading range. Forget about big upsides however. The liquidity bonanza is gonzo.

    BTW: the fed can stop at 5 1/2%, as other central banks around the world will finish to job.

  18. me2200 says:

    Does anyone have data or a link that compares the current market to 1987 ? Wasn’t the 1987 market sell off preceded by sell offs in the emerging markets ? AG was new at the time, right ? And he was tightening…

  19. me2200 says:

    I don’t mean to be so negative, but I smell something bad in the air these days.

    Consumer credit usage was high in April.
    http://www.msnbc.msn.com/id/13188285/

    Nobody seems prepared for a recession. Everyone appears to be living in Goldilocks land, where it seems just right. I say the average consumer is going to get hammered in this recession because they are carrying a ton of debt. And not only mortgage debt.

  20. AG says:

    1987 vs 2006 ……….Interest rates went from 7% to 10% in 1987 , the $ was down 50% after the Plaza accord received G-7 Ministerial approval in 1985 , and stocks were up 75% over the previous 24 months …. the comparison is a bit different

  21. steve says:

    I think the bond guys are looking for a recession… inversion or flatness has been with us for 6 months

  22. whipsaw says:

    It seems to me that Bernanke is being portrayed as a one man wrecking crew by a lot of people who have trouble dealing with reality. I personally prefer his relative candor to the dissembling of Greenspan, but am not surprised that it upsets a lot of people to learn that a binge is followed by a hangover.

    The entire spectacle of alleged adults squinting to see a rainbow in a hurricane may not be unprecedented, but it seems to me that it is more pronounced now than it used to be. Whether somebody other than Bernanke was nominally running things or not would not change the ultimate outcome which I personally believe will be rather dire mainly because of hedge fund implosions.

    I am finding it more difficult to see how there will be a test of the former highs on the way down and will probably just let my index puts ride even as they are meeting initial targets. I don’t want to get extra greedy, but I suspect that there are several support levels that will be broken before this starts to bottom.

  23. me2200 says:

    “It seems to me that Bernanke is being portrayed as a one man wrecking crew by a lot of people who have trouble dealing with reality.”

    Truer words have never been spoken !

  24. muckdog says:

    The market (SP500) sees a pullback of 5% or more a little over 3 times per year. Or so I hear. The market peaked at 1326 intraday, and corrected to 1245 intraday so far. I’m just wondering if we’re in frustrating trading range for the summer.

  25. mentalmodel says:

    One comment caught my attention today: “Institutional investors don’t care about Dow 11000, it’s only important to retail investors.” It strikes me as a bit naive. Surely retail sentiment that keys off of this affects fund flows, which in turn should affect the decisions of a perfectly rational fund manager (my most basic assumption is a large percentage of the movement in securities markets is driven by psychology).

    The opinions being offered by Bernanke and St. Louis fed chief Poole seem to be weighted pretty heavily by “big money”. My question is this. If the intended effect of restricting the money supply is to discourage bad investments or poorly informed speculation, why is this necessary if economic activity seems to be suffering from a lull (fat corporate cash balances, and tempered outlooks from CEO’s), and inflation is being driven primarily by high prices in commodities? Is a higher fed funds rate intended to deflate the commodities bubble, or is it also part of the game central banks are playing with each other to maintain trade equalization?

  26. mforbes42 says:

    If the decline should end on approx. June 15th (according to your probability-based metric), that puts it square in the middle of expiration week – which can make things interesting.

    I think I’ll just wait for the dust to settle next week before doing anything, much less call a bottom. Feels too late in the decline to go short…too risky to go aggressively long right here also.

  27. whipsaw says:

    per steve:

    “I think the bond guys are looking for a recession… inversion or flatness has been with us for 6 months”

    I just had a minor epiphany I think. The general rule of thumb is that bonds lead stocks by x months that lead the economy by x months. But one of Barry’s frequent contentions is that because of Katrina, a lot of stuff showed up in 1Q06 that normally would have been in 4Q05 which pumped up the markets artificially this year.

    So just maybe those same extraordinary circumstances have eliminated the markets as leading indicators of the economy? Maybe one reason why everything seems so strange now is that the economy and markets are moving concurrently without the 6-9 month lead time you would otherwise expect in a recessionary decline?

    What do you guys think?

  28. me2200 says:

    I can’t believe the magnitude of the sell offs in the foreign markets.

    Brazil -3.5%, Mexico -2.5%, Japan -2.11%, South Korean -2.05%. And they have been doing this regularly.

    Click on the charts and see for yourself.
    http://quote.yahoo.com/m2?u

  29. C says:

    whipsaw, I respond intuitively with a “yes” vote to your thesis.

    However, it also appears to me that the current market seems to be a reliable indicator of one thing only: uncertainty.

    Maybe there’s too much data out there. It’s too confusing and complex to make sense of it all, so the market reverts to the extremes: irrational anxiety or irrational exuberance. Prozac Nation, Prozac Market? (LLY +1.1% today, oddly enough).

  30. steve says:

    Nikkei down another 2% tonight , down for the year now ….. and South Korea down 2 % after their central bank unexpectedly raised its benchmark interest rate 25bp’s

  31. whipsaw says:

    per C:

    “Maybe there’s too much data out there. It’s too confusing and complex to make sense of it all, so the market reverts to the extremes: irrational anxiety or irrational exuberance. Prozac Nation, Prozac Market? (LLY +1.1% today, oddly enough).”

    Could be, could be. And I know that running arbitrage on the gap between perception and reality is what it’s all about and this is a perfect market for that, but frankly I’m getting beaten down by the process even as my puts make money. Very nerve wracking, hmmmm Prozac sounds good with a chaser of 40 yr old scotch.

  32. me2200 says:

    “So just maybe those same extraordinary circumstances have eliminated the markets as leading indicators of the economy?”

    The market just didn’t see it coming. The new Fed, BB, got tough on inflation whereas AG would have let things be. BOJ raised rates. Housing market went from status quo to bad in about 3 months.

    Bonds have been inverted for some time, but everyone wrote that off as an anomaly. I guess they were wrong.

    Meanwhile South Korea tightens a bit more, making the situation worse.

  33. angryinch says:

    “I can’t believe the magnitude of the sell offs in the foreign markets.”

    Doh. Why is the “magnitude” of the recent declines so hard to believe when you consider the magnitude of the gains that came before?

    After tonite’s shellacking, the Nikkei is now down 17.5% from its Apr high. But it rose 63% between Apr 05 and Apr 06 with a nearly vertical move from Aug-Dec. That’s a big move by any standard for a major index. We saw a panicky, money chase and now we’re seeing a panicky decline. As above, so below.

    The BSE (India) was even more astounding. It moved 107% from Apr 05 to May 06. Now it’s off 28% in just four weeks. Panic buying leads to panic selling.

    Would not surprise me to see these hotsy-totsy hedgie playtoys return in relatively short order to their summer or fall 2005 levels, essentially erasing the entire frothy moves of the past 6-12 months.

    The crashes in the Middle Eastern markets in Jan/Feb were the canaries in the coal mine for what we are now seeing in Japan, India and elsewhere.

    I don’t expect the U.S. markets to follow suit, despite Barry’s predictions of Dow 6,800 by Oct. The SPX, for example, is only off 6.2% while Japan is down 17.5% and India 28%.

    The U.S. indices are already at their summer 2005 levels. The sectors and markets that are being the hardest hit (and will continue to be) are the ones with the most froth and the most profits to preserve.

    How can there be profit-taking in the Dow when no one has made a dime off the Dow in the past 2.5 years? It’s pretty much trading exactly where it was in Jan 2004.

    All we are seeing is a mad dash for the exits in the hottest sectors/indices as folks who were chasing them up now try to hit the door.

    This is nothing new. We saw the same thing in May 2004 when the BSE took a 33% dump in just a few weeks. No way to know yet if this is just another volatile correction or the beginning of something more sinister. But wouldn’t be a total shocker if the U.S. markets outperformed emerging for the next 6-12 months.

  34. The Market Will Rise Again. You Can Almost Set Your Watch By It.

    Print out a line chart of the S&P500 for about 2 years. Draw trendlines for the absolute top and absolute bottom. Then spot the intermediate highs and lows and draw trendlines there.

    You will see an amazingly predictable pattern of ups and downs in terms of both timimg and scale.

    While, of course, this one might be the one that starts everything over, don’t be surprised if the S&P is around 1320 at the end of June or early July regardless of what anybody does.

    Spooky, huh?

    World markets generall fall or rise in sympathy with the US markets.

    BTW, the lower quality emerging markets were said to fall because of liquidity removal by the Bank Of Japan. No interest loans were not being renewed and rational behavior was the result. Higher quality emerging markets fell because the average investor sees all markets outside the US as incomprehensible and suspicious.

  35. VJ says:

    “Jeff notes, however, that some stampedes have extended for 25 – 28 sessions, but it is rare for them to go more than 30″

    Like the one that went from 1966 to 1982 (1992 in inflation-adjusted dollars) ?
    .