More on History and Volatility

Not that we're not generally active here on the blog, but it's times like these when we get to step it up several notches. 

It's tempting to pull from the archives of past market corrections and offer up the quotes, videos, stats and so on from times when the market saw every bit (more at times) of the rapid % declines we're presently experiencing; times when the Dow was multiple thousands of points lower than where it is right now. We of course may indeed resort to that, but, for this particular post, I can draw from something as recent as 2 weeks ago.

With updated commentary ahead of each excerpt, I'll pull from our January 24th blog post titled "Why We Keep Reminding You About Volatility".

For starters:

"To cut to the chase: Certainty is a luxury no one can afford when it comes to world financial markets. And anyone -- credentials notwithstanding -- who would predict markets (any markets) with table-pounding certainty is someone to avoid like the measles!"

January may already seem like a distant memory, but, indeed, it was one of the best January's on record. In the post we noted that it was one of only 9 where the S&P 500's gain exceeded 5% for the month. And how, historically-speaking, that bodes well for the year going forward: 

"As of yesterday the S&P 500 has logged its seventh-best start to a year in history; there have been only 9 (counting this year) with returns exceeding 5% by January 23rd. And save for the two Great Depression occurrences, that's historically good news for the bulls: The average full-year gain for the remaining years that experienced a better than 5% gain as of January 23rd was 21.35% (10.85% counting the recession years)."

Yes, but, if you were thinking that the average 21.35% for the occurrences outside of the Great Depression came easy, we warned that you should think again: 

"Here's where the slow-dance music comes in: The average max decline (during the year) from January 23rd in each of those years was -8.49% (-15.19% counting the depression years)."

After today's action, the S&P 500 is off 7.9% from its recent peak. Still not even to the average max drawdown for those ultimately positive years (no guarantee for this year mind you) that started like this one.

As I suggested in yesterday evening's video, further selling from here would in no way be out of the historical norm, so we may indeed exceed that average drawdown in 2018.

I'll close with a snippet from another recent blog post. Refer to the video to get the latest from the analysis we analogize below. I'll highlight the pertinent section:

Imagine that we've captured a very large beautiful eagle. And imagine that we've affixed it with electrodes that monitor its key vitals: Such as its heart rate, blood pressure, blood oxygen level, etc.; as well as its wing beat patterns and its trajectory as it ascends to -- and descends from -- various altitudes. Now imagine that every Monday morning we gather and put into a model all of this data that inform us as to the present general health of our giant bird.

Sitting here in the present, as we turn on our monitors we of course acknowledge that our eagle has indeed soared its way to altitudes that it hasn't previously experienced, but, frankly, that's not our concern. Again, our concern is its general health and whether, given our findings, we believe it can weather the headwinds and storms that it may encounter at virtually any altitude. 

In essence, is our eagle in a good place? Is it strong? Under turbulent conditions would it simply descend to a calmer altitude (say, to a few thousand feet [read Dow points] below) where it would glide around until the winds subside, then resume its previous pattern and ascend to yet greater heights? Or is it exhibiting a level of stress that would have it collapsing in the face of an unexpected storm; tumbling to substantially lower altitudes where it would require an extended period of recuperation to build back the strength, stamina and confidence necessary to at first retest the previously failed altitude, then potentially breaking above and reaching for yet higher highs? 

In the latter instance we'd need to determine what steps to take (what reinforcements we might deploy) to mitigate the potential damage that a rapid fall from such an altitude might levy upon our eagle; recognizing that any protective measure(s) would likely limit its ability to push to yet greater heights should the signals recorded by our system turn out to be false.