S&P 500 5% Pullbacks
By Barry Ritholtz - March 17th, 2011, 10:45AM
Interesting chart from Birinyi Associates:
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S&P 500 5% Pullbacks (3/9/09 – 3/16/11)
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They add:
“What is perhaps more encouraging is the fact that 5% declines do not usually result in a further 10% decline, and a bear market is even less likely. An initial 5% decline, such as the one beginning on 2/18/11, only results in a correction (10% decline) 33% of the time, and in only 11 of 106 instances has a 5% decline turned out to be a bull market top.”
In other words, in 10% of the times, a 5% correction marks a bull market top . . .
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March 17th, 2011 at 10:58 am
That’s nice to know.
Having the chart start in March ’09 also helps as that’s the start of this bull leg. It would be nice to see the chart extended backwards to cover a few bear markets too.
March 17th, 2011 at 11:15 am
Hey – Now even I can see the usefulness in this chart! So we might be nearing the end of the correction.
March 17th, 2011 at 11:37 am
So now we’re not at the end of the cyclical bull anymore, it’s just a 5 percent correction.
My vote is on this being the end of the cyclical bull. With the end of QE2 approaching, it’s too risky for the Vampire Squids on Wall Street to stick their neck out. Since they’re forced to move billions in and out of the market to support their bonuses and exorbitant lifestyles, it’s too much trouble for them to position themselves for what may be only a brief move back to the highs and then the inevitable sell-off at the end of next month or early May.
I say the only buyers left are the ‘mysterious pre-market futures buyers, the trade-bots, and the extremely dumb-money, waiting to buy the dip.’ The squids have left the building.
March 17th, 2011 at 11:40 am
I’m not a statsitician – but 5% declines aren’t all the same.
This isn’t just a 5% decline. It’s the 6th 5% decline in a bull run of almost 100% gain in 2 years.
March 17th, 2011 at 11:46 am
Well, at least they used a large sample. Going back two years covers all of recorded financial history.
March 17th, 2011 at 11:47 am
Looks to me like the 5% decline of last April became a nearly 20% decline by the end of June (1217 on April 22 to 1022 on July 2).
March 17th, 2011 at 11:49 am
it is also opex this week so that is adding to the fireworks.
I use the type of info above in my probability trading. I’m not the math wiz that others are around here but in my theory if a market or stock has gone down 10% today (assuming it still has book value, dividends, etc.) then the probability of it going down 10% tomorrow decreases. If it goes down 10% tomorrow then the probability decreases all the more so the odds begin to work in your favor. The reverse is applied on the upside. I plan my money management and trades around those probabilities knowing that the market has a natural upward bias (uhhh, excluding the last DECADE of course). I won’t go into details because we are dog eat dog around here. If you want details it’ll cost you $100K :) ….but it will be worth it ;)
March 17th, 2011 at 11:55 am
As of yesterday’s close:
Sym 52-wk High Today’s Close change
DOW 12391.29 11613.46 -6.28%
NAS 2840.51 2616.82 -7.87%
S&P 1344.07 1256.92 -6.48%
Intraday losses were a tad more.
March 17th, 2011 at 12:15 pm
“but in my theory if a market or stock has gone down 10% today (assuming it still has book value, dividends, etc.) then the probability of it going down 10% tomorrow decreases. ”
I suspect this is incorrect.
March 17th, 2011 at 2:06 pm
longer sample would be nice to see the impact without Bernanke put
last spring a lot of pundits were expecting a correction… it didn’t happen… (ex-flash crash)
I think with a firm bid from the Fed it would be hard to imagine a 20% decline going forward…
March 17th, 2011 at 2:21 pm
This is almost certainly NOT a top and the beginning of a bear market. This is just a correction, but one that I believe will get worse before it gets better:
More details here:
http://efficientish.blogspot.com/2011/03/we-arent-afraid-enough.html
March 17th, 2011 at 4:02 pm
http://www.readtheticker.com/Pages/Blog1.aspx?65tf=162_be-greedy-when-others-are-fearful-warren-buffett-2011-03
http://www.readtheticker.com/Pages/Blog1.aspx?65tf=157_spy-all-tucked-in-a-tight-gann-angle-corridor-if-it-breaks-ouch-2011-03
http://www.readtheticker.com/Pages/Blog1.aspx?65tf=153_dow-theory-with-hurst-cycles-2011-03
March 17th, 2011 at 10:02 pm
How the Common Man Sees It: you should read Benoit Mandelbrot’s “Misbehavior of Markets”
http://www.amazon.com/Mis-behavior-Markets-Benoit-Mandelbrot/dp/0465043550
which suggests clustered volatility in equity markets, meaning a catastrophic drop of more than 10% on a single day could very likely be MORE likely.
(not saying it’s a correct theory, just saying you should read it for the other perspective)
March 17th, 2011 at 10:05 pm
after a previous loss of course, as you stated in your post.
March 17th, 2011 at 10:43 pm
[...] marks the 6th such 5% or more pullback since the bull market began. From Birinyi Associates via Ritholtz [...]
March 18th, 2011 at 9:55 am
@Common Man…
Are you serious with that? Who would pay even $100 for you to state that the market has a natural upward bias…”except for the last decade”…
All you are using is a martingale theory of buying into downtrends…a definite way to go broke…
If you are going to post something that weak on here, bring a little more statistical backup…
March 18th, 2011 at 12:17 pm
@macro,
Why? I trade for me and if I taught others what works for me I would quickly negate the benefits. All that matters is that I know it works. It is not a bullet proof system but it eliminates a lot of mistakes, is contrarian in nature and takes a lot of emotion out of the trade. That in itself puts you way ahead of many in the market.
@DiggidyDan,
Yes, I agree with that but at some point the trade becomes a screaming value buy and if you are managing your money right and buying the right security then you are usually getting something good at a forced good price. Anything I trade I am willing to own permanently and no less that 30% of the stock position I trade in will never be traded so right off the bat I am building my stake in something that has intrinsic value in the economy.
The thing is, usually the only time I expect to see gaps down or multi day gaps in the things I own (I prefer mid to large cap ‘optionable’ stocks and, of course, indexes) are when the elephants (the big funds) are selling and they almost always are only selling for reasons not associated with the stock but with a panic in the economy or because they need to raise cash.
Those are the times I want to be buying from them because they will be buying back in when the panic is gone so most times they will restore the stock to somewhere near what they started abandoning it for in the first place.
There is a lot more thinking, money management and trading that goes into what I do but that is the basic philosophy.