In case you missed it, the Dow was down around 300 points yesterday to bring the index into negative territory for the year (just a handful of days after hitting a new intra-day and all time closing high) – spiking the Vix 27% and no doubt bringing a bunch of worrisome headlines around the financial world today along the lines of:
Here it is… this is the big one = Marc Faber followers
Eureka! Volatility is back! = Managed Futures & Global Macro managers
Stocknado = Josh Brown
We’ve been due for a pullback = such and such asset management co.
Relax, it’s all in your mind = Barry Ritholtz
The easy thing to do today is write about how this shows just how scary stocks can be… We’ve surely done it before (here, and here). To talk about how and why you should be diversified (here), and to talk about this could be the start of a move lower as evidenced by a few chart patterns (divergences in the Russell and MidCap). But every time we’ve done that for the past 5 years, we’ve been wrong.
Every dip like this over the past five years has been little more than that – a dip. It hasn’t been the start of the next big bear market. It hasn’t been the crash we’ve been waiting for and the return of big volatile swings. It’s usually been one off. A quick bout of selling in the otherwise boring day after day slow grind higher, leading to those complaints about there being no volatility.
Consider the numbers since the lows in March of 2009. Since then the S&P has experienced a single day loss of -1% or more 169 times, -1.5% or more 88 times, and -2% or more 52 times (with about 45% of all of those happening in 2009 and 2010). That’s not a whole lot of days out of the 1,300+ days the market has been open, but it’s not all that rare either. These days happen. But what concerns us more than the fact that they happen, is what typically happens after them. What’s the average return of the S&P 1 day, 30 days, and 90 days after experiencing a -1% loss or greater? That’s the type of question we’re interested in. Turns out – buying the close on such a day the past 5 years has been an excellent strategy.
The average next day performance after a big down day (loss of more than 1%) has been about three times the average daily performance (.25% versus .09%). Talk about BTFD… (look it up). We’re told as young investors to be very careful trying to catch the falling knife, but this has been more like catching a falling balloon, untying it, and watching it zoom higher.
Who knows what today, the next month, and next 90 days will bring. Is this drop a falling balloon unable to do any damage, or the proverbial falling knife which might cut your hand off? We won’t pretend to know – but we’re sick of treating every one of them like the falling knife. They won’t all be dangerous to catch… and indeed they’ve been anything but for the past five years. “This time is different” is notoriously wrong, and to say this sell off is any different from the other 160 or so we’ve seen in recent memory would be stretching it.
One of these times it will be different, and long volatility strategies such as managed futures and global macro will be waiting – but the odds here likely favor another bounce higher and new all time highs on the horizon for stocks.
PS – Mr. Market – this is an attempt at some reverse psychology. We really do want some volatility and down moves, not a return to the slow crawl higher… We’re hoping a nod to the likelihood this amounts to nothing may in fact make this time different.