- Tuesday was a bad day. How bad was it?
- I present some visual aids for putting things in perspective.
- The party is not over, but the lights are flickering.
- This idea was discussed in more depth with members of my private investing community, The ZenInvestor Top 7. Start your free trial today »
How bad was Tuesday's market action from an historical perspective?
Tuesday's market decline was a real doozy. I describe it like this: Tuesday was a "make the rubble shake" drop in the market. We just came off a 10% correction in October-November, and the dip-buyers finally showed up to rally the troops and push the rally-sellers back. It was a valiant effort, but Tuesday the rally-sellers showed just how serious they are in this battle of wills.
Is this the end of the historic bull run that began in March 2009? Maybe. But one of the lessons I learned early in my career as a trader was that one day's action does not determine the course of the market over the next year. Just look at what happened in 1987. We had a one-day drop of 20%, and almost everyone was convinced that the market was headed for zero. It didn't happen. There wasn't even a recession. It was the worst one-day decline in history, by far. But the market picked itself up and made a new high just a few months later.
The real damage done was to investor confidence. There's no real measure available for this, but you don't have to look far to see evidence of fear and loathing on Wall Street and Main Street. Here are a few visuals that I hope will put Tuesday's market action into perspective.
The Hurricane Scale
Let's imagine that Tuesday's action was equivalent to a market hurricane. Using this analogy, Tuesday was clearly a category 5. I say this because I looked at the historical record of one-day declines in the market, going back to 1950. There have been 17,343 trading days since 1950, and Tuesday was the 78th worst day recorded. That puts Tuesday's decline in the bottom 0.6% of all trading days since 1950. I don't think I'm overstating the case when I say that Tuesday's market decline was a doozy.
The Dreaded Death Cross
The Death Cross is the position of the short-term moving average (50 days) relative to the long-term (200 days). It seems arbitrary, and it is. But there's a very large cohort of investors who believe that when this relationship turns negative there will be much worse things to come. History shows that this indicator has a decent but spotty record due to false signals. But it's worth noting because it's a very widely used talking point for chartists and perma-bears. CNBC will probably do a segment about this.
The current reading is a positive 0.2%, so we haven't quite crossed the line yet. On an absolute basis, we're still safe from the Death Cross. But on a trend basis things look a little more worrying. It was only two months ago that this indicator was showing a positive 4.2%. The fall from there to where we are today is significant, and worth paying attention to.
It should not surprise anyone that volatility spiked Tuesday. But it was the scale of the spike that got my attention. A 26% jump from Monday is a big number. It tells me that the big options players were willing to pay heavy premiums for protection against a bloodbath in the S&P 500. Bear in mind that these are not mom and pop investors who are buying 1 or 2 puts at a time. These are institutions and professional options traders buying hundreds or even thousands of puts at a crack. That is serious money at work.
I haven't had time yet to look at my other trusted indicators of market health and direction, but I think it's safe to assume that many of them are now flashing yellow or red. But I will not panic and rush to the exits just yet. After a "make the rubble shake" decline like we saw Tuesday there's almost always an oversold or dead-cat bounce. I will look for clues that this drubbing might continue, but I won't jump the gun because that almost never works out well.
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Analyst’s Disclosure: I am/we are long SH.
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