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Rock228
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I trade volatility ETPs (SVXY, XIV, UVXY), S&P 500 through SPY, UPRO, SPXU, and invest long term in Dividend Growth stocks with high dividend CAGR values. Individual stock picking is a waste of time to me unless the company pays out large and high growth dividends. Macro mixed with... More
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  • THE MYTH OF THE 10% CORRECTION

    Ok so it isn't a myth, they do exist but not as often as many claim. I don't know how people get their metric for 10% corrections but my method is from close to close using the SPY. I think everyone does that. But I also think they include say the last 20 years including the recession years. Once the market hits the market top and starts a full bear market down (recession) I don't think it is useful using those values during a recession to figure out how likely you are to get a 10% correction in your current bull market because a lot of 10%+ corrections happen during a 50%+ bear market recession. So when you compare apples to apples - Bull Market to Bull Markets - how often do 10% corrections happen?

    I focus on the last 15 years (the last two bull markets) for all my data and exclude the bear markets (recessions). Using those metrics you get the following:

    1/8/19993/24/2000114Months
    10/9/200210/9/2007160Months
    3/9/20094/9/2015273Months
      3133Months
      144Months

    So as you can see you get a 10% correction about every 44 months on average or ~ every 4 years. Not very often at all. And if you go a step further, we have already had 2 corrections in this current up cycle which means historically speaking we have already reached the maximum number you would expect before the market peaks. So purely statistically speaking we have a very low chance of a 10% correction BEFORE the market tops - this is the exact opposite of every claim I see out there that we are "due" for a 10% correction.

    There is one other thing I have noticed in the last 15 years. There are always large(ish) draws (6%-9%) happening right before the 10%+ correction. Never a gap between where you had say a 3%-5% draw small draw and then the big 10%. Each and every time there is a 6.4% or larger tremor draw before the large earthquake 10%+ draw. So it seems the markets give you a warning before the big one. I have not heard or read a single person state these facts before.

    Now despite all that I would not be surprised to see a 10% correction sometime this year or early next year especially if the Fed actually raises interest rates (I don't think they will). I do not expect a correction to happen or feel that we are "due" - my reasoning on the correction is the massive volatility in currencies from the dollar strength, global growth/inflation slowing and the Fed tightening monetary policy. These are all practical reasons but either way I wouldn't be surprised.

    The moral of the story is the 10% correction call seems to happen every few weeks and has almost nothing to back it up. The talking heads on TV (I believe) are simply making stuff up or trying to get on TV by making these calls. There is not much (if any) real substantive reasons for these calls being made. The true facts about 10% corrections are:

    1) They rarely happen - 1 every 44 months.

    2) They always have a tremor draw first of 6%+

    3) We have already had two 10% corrections in this bull market, which means statistically speaking we have already hit our correction limits

    So there you have it, the myth of the 10% correction. Please post below if you have found any of this information put out by any of the major business news outlets.

    Apr 08 1:03 PM | Link | 1 Comment
  • AFTER JOBS # IS THIS THE BIG ONE?

    If history is our guide then the answer is NO. There are always tremors that are heard before the big earthquake and the data bares that out back to 1999 (that is as far as my data goes back). The last three large draws during the bull markets all had a 7%+ draw before a 10%+ draw. And going back to 1999 we have always had at least a 6.4% draw before a 10%+. Here is the actual data (ex Bear Markets using SPY data):

    5/27/1999

    -6.4%

    10/15/1999

    -11.9%

    2/25/2000

    -9.3%

    4/14/2000

    -11.4%

    12/27/2002

    -7.3%

    3/11/2003

    -13.7%

    8/15/2007

    -9.0%

    11/26/2007

    -9.9%

    1/22/2008

    -14.0%

    2/8/2010

    -8.0%

    7/2/2010

    -16.1%

    6/24/2011

    -7.1%

    10/3/2011

    -19.4%

    SO HOW BIG WILL IT BE?

    So if we do fall back this week we know with a very high certainty this will not be a 10%+ draw. But what are we likely to see? I went to the data and looked for a time the market meandered around a 1-3% draw for about a month and low and behold I found June of 2004 (first rate hike was June 2004 during the last rate cycle) and Sept/Oct 2012 (the last time we had an earnings recession). What a strange coincidence this time we are having both rate hikes soon (supposedly though I don't believe it) and an earnings recession expected. In June 2004 it was a 6.5% total draw. In October 2012 it was a 7.8% draw. So my best guess is we are more like October 2012 (the draw in 2012 didn't accelerate lower until the 1st day of bad earnings) and will have ~7% draw. Earnings season starts at the close on Wednesday April 8th (3 trading days from now) with Alcoa.

    I will be positioning myself to expect a 7% draw but because I can't guarantee we get there I will be looking to buy a large chunk of UPRO at the end of the 3rd down day of the next mini draw. Remember to keep in mind that "bottoms" are usually not reached until at least 1 VCO indicator turns red and usually 2 or more indicators are red. That will be my other "tell" on when to buy and at that time I am likely to pile into SVXY with the rest of my money. I will post my trades. In the meantime I am fully invested in TLT.

    One final note. All the real data (non touchy feely survey data like Consumer Confidence) has been steadily declining in a stair step since December. Commodities have been crashing for almost a year and the dollar has been rising the same. If things don't change the momentum is towards a recession sometime this year or early next year. Markets tend to top shortly before recessions take hold and they tend to top in March or October. I doubt March is our top but until the data gets better October is a real possibility. Feel free to call me crazy LOL!

    VIX Contango site:

    http://vixcontango.com/

    Tags: SPY, UPRO, SVXY, TLT, Draws
    Apr 04 1:41 PM | Link | 14 Comments
  • MARCH VOLATILITY

    Looking at the last 10 years March has seen an outsized amount of volatility and SPY draws. Here is a list of the biggest draws and a list of all the significant draws since 2004.

    2004

    March 8th Top

    -6.0%

    1st Top

         

    2005

    March 7th Top

    -5.1%

    1st Top

         

    2006

    -1.54%

    -1.38%

     

    Already Top 1/11/06, Bottom -3% 2/7/06

    Next Top June 9th

    2007

    -2.50%

    back to -1.81%

    -1.08%

     

    1st Top 2/20/07

    Draw Total -6%

              

    2010

    -0.96%

    -0.71%

           

    2011

    -5.10%

      

    Top 2/18/11

        

    2012

    -2.16%

    -1.17%

    -0.97%

    Top April 2, 1st day

        

    2013

    -1.51%

            

    2014

    -0.70%

    -1.91%

    -1.95%

    Top April 2, 2nd day

        

    SIMPLE LIST OF THE MAX DRAWS EACH YEAR

    2004

    -6%

    2005

    -5.10%

    2006

    -1.54%

    2007

    -2.50%

    2010

    -1%

    2011

    -5.10%

    2012

    -2.16%

    2013

    -1.51%

    2014

    -1.95%

    Also March has one of the 2 times the 1.8% rule fails to reach a new low and it looks painfully similar to what is happening right now. Up 1st day of the month and then a down move after.

    Date

    SPY Drw%

    DAILY %

    2012-03-06

    -2.16%

    -1.46%

    2012-03-05

    -0.71%

    -0.41%

    2012-03-02

    -0.30%

    -0.30%

    2012-03-01

    0.00%

    0.52%

    Date

    SPY Drw%

    DAILY %

    3/3/2015

    -0.41%

    -0.41%

    3/2/2015

    0.00%

    0.63%

    5 trading days after March 6th 2012 bottom we were back at new highs. This was a false start on a larger draw and is one of the things we need to try to avoid. My thinking is if we do get a 1.8%+ mini-draw starting here I would add to my UPRO position and not try to short the bounce just to be safe.

    The moral of the story is to expect at least a 1% SPY total draw at the close in March.

    PS- I meant to post this 3/2/15 at night but things came up.

    Mar 04 10:10 AM | Link | 1 Comment
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