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Minyan Mailbag: Where We Are Relative To History


Given any sort of mean-reversion on long-term volatility the trading opportunities between now and year-end should be quite good.

Team Minyanville,

I thought you, Boo and the others might appreciate the following. I love any analysis that can offer an edge with simple inputs.

Based on history, outside of a crash, the probabilities argue for sideways to higher prices on the S&P 500 into month end.

Using 696 monthly observations of the S&P 500 since 1950, I looked at how this month compares.

Currently the S&P 500 is down just over 5% for November. Seasonally, November is a very positive month. 67% of the time it is positive with an average return of +3.3%. So we are already in "outlier" status. But this is just seasonals and doesn't give us a very robust picture.

Looking at the full data set of all 696 months, I filtered for months where the monthly peak-to-trough drawdown was at least -5%, regardless of how the month ended up. I did this because the current month is already beyond the -5% level.

The question is, on average, once the market has lost 5% in one calendar month, where does it end up? There are 130 such monthly observations or about 19% of the total data set where the S&P 500 has been down a minimum of 5% in one month. Of course the vast majority of these months are losers (115=89%) and the average return is - 4.1% (so, on average, the market has rallied back into month-end after a minimum intra-month drawdown of -5%).

However, of the 115 losing months, 56 (43%) scored month-end returns below -5%. These are months that did not bounce back. So there are some big negative months in there. The average loss of those 56 "big losing months" is - 7.4%. This set includes the 1987 crash, so the distribution is obviously skewed. In any event, without being statistically pure, let's just say the "extreme metric" for a "big losing month" is -7.4%. This is generous.

We could continue down this road but the path is clear. Outside of a crash (e.g. October 1987 -22%, August 1998 -15%), we probably can't expect much more downside on the November-end S&P 500 print.

Of course, we could drop another 3% Monday and then rally 5% into month-end. The point is that probabilistically we are close to the end of the move for the month, unless we crash. And, given any sort of mean-reversion on long-term volatility the trading opportunities between now and year-end (and frankly as far as the eye can see) should be quite good.

The likely path that price will take between now and month-end is anyone's guess. Right now, if one were hanging with Boo, (as we have been) – looking at the past 57 years – reaching much beyond this on the short-side may not warrant anything close to full risk.

-Minyan Andreas
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