Eric Parnell, a US Portfolio Manager, wrote an interesting article in Seeking Alpha recently. Here is the link to his article Uncomfortably Numb
As we approach the end of the first half of the trading year, Eric notes that the stock market has had only 2 days that fell 0.7% or more in the past six months. To quote from the the article:
“…how truly unusual is it to have a market that has only gone down twice in the first six month of the year and four times over the course of a calendar year? Extremely unusual. To put this into context, over the past 88 calendar years of market history – which is a fairly decent sample size, to say the least, across all different kinds of market environments – the stock market will fall by more than -0.70% in 17% of trading days in any given year on average. Putting this differently, in any given trading year, stocks will fall by more than -0.70% on 43 trading days on average. But this year, we are on pace for just 4, which represents less than 2% of all trading days for the year. Unusual indeed.
How unusual is this disparity between upside and downside volatility in today’s market? The normal ratio of +0.70% to -0.70% trading days in any given year dating back to the late 1920s is roughly 1.1-to-1. In 2017, it is setting up for a ratio of 5.5-to-1. This represents a more than +7 standard deviation event, if this ratio held through the remainder of the year. Put differently, what we are seeing take place in the U.S. stock market today in terms of upside volatility versus downside volatility is something we should expect to see once every 1.1 billion years. So yeah, I would say what we are seeing right now is a little unusual.”
Above is a chart of the S&P 500 marked with Raf linear regression lines. Linear regression lines are drawn by starting the line at a low point on the chart where a trend began, and extending a line to the high point of the chart where it appears that the trend has ended or paused. The middle line represents that starting and finishing point of the trend or wave, and the surrounding lines simply take the high and low points of volatility within that period. The linear regression line gives us an eyeball on how much up/down price movement happened over the chosen period. I’ve selected the start and finish lines for my linear regression studies by using the 5 waves noted on my “Elliott Wave Theory (EWT)” blog in May.
Price swings contained within each up-wave have been typical for a normally progressive bull market. That is – within the 3 up-waves –
- Wave 1 contains big price swings as the crowd wrestles with the end of the bear,
- Wave 3 is fairly steady and long as the crowd starts to believe in the new bull market,
- Wave five is typified by a sharply rising market (“tight and to the right”, as is said in my cycling group rides). Wave 5 is the final move of the bull market as the crowd becomes overconfident and speculative.
Mr. Parnell’s observations seem to match those of my EWT interpretation of the current markets. It adds another reason to keep a sharp eye on the horizon for changes in trend.